The IRS has issued new maximum deduction amounts for long-term care insurance premiums for 2017. It is important for long-term care insurance policy holders to be aware that at least a portion of the premiums paid for qualified long-term care insurance policies may fall under the medical expense deduction. However, seniors must also understand that the medical deduction threshold for those over 65 years old has increased for the 2017 tax year.
The maximum amount that a policyholder can deduct for payment of long-term care insurance premiums on his or her income taxes is indexed for inflation as calculated each year by the IRS. The amount that is deductible may not be the full amount of the premiums paid. Additionally, like other medical expense deductions, this is available only to those who choose to itemize deductions and is subject to the medical deduction threshold.
The amount that is deductible is based upon the policyholder’s age, and rises for an older individual. Any amount paid above the IRS limit is not deductible as a medical expense.
In 2017, a person who is 40 years old or younger has a maximum deduction of $410.00. Someone between the ages of 40 and 50 can take a maximum deduction of $770.00. A 60 through 70 year old can deduct a maximum of $4,090 next year. Policyholders over 70 can deduct up to $5,110 in premiums on his or her income tax return.
When determining the maximum premium amount that is deductible, as with other medical expense deductions, long-term care insurance premiums fall under the medical expense deduction threshold, sometimes referred to as a floor. In 2016, and for some years prior to that, those over the age of 65 could deduct medical expenses at a lower threshold of above 7.5% of his or her adjusted gross income. However, the threshold has increased for medical costs to 10% of adjusted gross income for all filers starting in 2017.
As an example, let’s look at Bob, a 71 year old who had an adjusted income of $50,000.00 a year. Bob has $8,000.00 in medical expenses, which includes $6,000.00 in qualified long-term insurance premiums paid in 2017.
While Bob can use all of his qualified medical expenses, including his long-term care insurance premium, his resulting tax deduction is only for total qualifying medical expenses above and beyond the 10% floor of his adjusted gross income. In other words, Bob needs qualifying medical expenses exceeding $5,000.00 a year to take the medical deduction, and then only his qualifying expenses in excess of that $5,000.00 can be deducted.
Bob would have $2,110.00 in deductible medical expenses:
$5,110.00 maximum long term- care insurance premium deduction 2017 + $2,000.00 in other medical expenses
= $7,110.00 allowable medical expenses
$7,110.00 allowable medical expenses
- $5,000.00 floor
= $2,110.00 in deductible medical expenses
Contrast this with 2016 where Bob has a 7.5% floor, which would allow for deductions over and above $3,750.00 a year. In 2016 with the same income and medical expenses, and a long-term care insurance maximum deduction maximum of $4,870.00, Bob would have $3,120.00 in allowable medical deductions.
In 2016, Bob would have $3,120.00 ($1,010.00 more than 2017) in deductible medical expenses:
$4,870.00 maximum long-term care insurance premium deduction 2016
+ $2,000.00 in other medical expenses
= $6,870.00 allowable medical expenses
$6,870.00 allowable medical expenses
- $3,750.00 floor
= $3,120.00 in deductible medical expenses
It is important to have a team of professionals that can work together for you to determine what is best for your long-term care needs, income tax situation, and estate planning wishes. At Marshall, Parker & Weber our attorneys welcome working with your financial advisor and accountant to develop a multidisciplinary plan that works best for you.