There are 46 million Americans over the age of 65, and the expected percentage of people turning 65 who will need long-term care during their lifetime is 52.3 percent. However, as of 2014, only 7.25 million individuals had LTC insurance coverage.
Why do so few have it? It costs a lot more than people want to spend, and it is difficult to picture yourself so incapacitated that you can no longer take care of yourself. Many people ignore the issue and hope they die in their sleep.
Some individuals can write off LTC premiums if they exceed 10 percent of their adjusted gross income because premiums are considered medical expenses. If you are a W2-earning household with $200,000 adjusted gross income, you have to top $20,000 in medical expenses just to begin to write off some of your premiums. This is not a very good tax break.
Business owners and the self-employed, however, have an incredible tax strategy that can make LTC insurance really affordable. We recently ran a quote for LTC insurance for a couple in their 50s that was going to cost $3,450 per year. If they owned their own business, they could write off $3,060 of their premium based on the 2017 limits below.
If this couple is in the 28 percent tax bracket, their policy only costs them $2,593.20 per year instead of $3,450 (3,060 x .28 = 856.80). As they get older, they can deduct even more.
Here are the basic rules for different types of business owners.
Sole proprietors can deduct LTC insurance premiums as a self-employed health insurance expense on Form 1040, line 29. It is above the line for adjusted gross income deduction and not subject to the 10 percent of AGI floor. However, the age based limit still applies.
If the sole proprietor's spouse is a bona fide employee of the business and the business pays for the policy as employee compensation, the full amount of the premium can be deducted as a business expense and not be included in the spouse's income.
If the business buys a policy for the employee spouse that also covers the sole proprietor, such as when the employee spouse individual coverage has a shared-care family rider attached, it could be considered fully deductible family coverage and the sole proprietor's premium would not be limited by the age based limitation.
Partnerships (and LLCs taxed as partnerships) may be able to deduct LTC insurance premiums as guaranteed payments, which would be deductible by the partnership and added back to the partner's income. However, partners are treated as self-employed, so they can also deduct the premiums above the line, subject to the age based limitation, but not subject to the 10 percent of AGI limitation. In this case, the premium must be paid by the partnership and not the individual partners.
A more than 2 percent owner of an S Corporation is treated like a partner in a partnership, so the above rules apply. The S Corporation would deduct the LTC insurance premium, and it would be included in the income of the shareholder employee. The shareholder employee would claim an above the line deduction subject to the age based limitation, but not the 10 percent of AGI limitation.
Partnerships, LLCs taxed as partnerships and S Corporations can deduct LTC insurance premiums paid for employees and the employee's spouse and dependents without having to apply the age-based limitations. Partnerships and LLCs can pay for an employee who is a spouse of the partner/owner and not be limited on the deduction due to the age based limit.
However, in the case of an S Corporation, the IRC Section 318 family attribution rules apply. Under these rules, a spouse of a more than 2 percent shareholder is treated as owning the shareholder's stock, and is thus treated as a 2 percent owner, subject to the owner limitations.
C Corporation owners can deduct LTC insurance premiums for themselves, their spouse, dependents and employees without being subject to the age-based limitation and the owners/employees are not taxed on the premiums. The premiums must be paid directly by the employer and not as part of a Section 125 cafeteria plan in order to qualify.
LTC insurance can be a tax-advantageous way to reward your employees, because payments for "accident and health care plans" (which includes LTC insurance) are not included in the employee's income. Like other employee benefits, a business' payment of LTC insurance premiums on behalf of employees is a deductible expense to the business and not taxable income to the employee. However, there are limitations on the deductibility of the premiums when the business owner is an employee of their own business.
The LTC deduction for businesses is often overlooked. If you are a small-business owner and your spouse is an employee of the business, this is definitely an area to explore. Now that you know you can save $1,000 or more off the cost of your long-term care, it is time to revisit this important insurance. If you are a key employee of a company, you should consider asking your employer to pay your premiums the next time you are renegotiating your salary.
(Editor's Note: This column originally appeared at Investopedia.com.)
— By Kim Gonzalez, CPA, financial planner at Domestique Capital