Long-term care: Tax breaks will ease the burden

Staying Ahead

December 01, 1997|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

THE SENIOR circuit is buzzing about the new tax deductions for long-term care. That perks up the ears of middle-agers, too.

The write-offs come in two flavors. First, there's a tax deduction for buying long-term care insurance. Second -- and even better -- people already receiving care, at home or in a nursing home, get to deduct uninsured costs.

These new tax breaks both took effect this year. But as usual, there are some angles to consider. Here are the rules:

If you buy long-term care (LTC) insurance -- individually or at work -- part of the premium may be deductible on your tax return as a medical expense.

But to get the deduction, your policy has to be "tax qualified." All long-term-care policies issued prior to 1997 are tax qualified, as long as they meet state LTC rules. Most do.

Policies issued since Jan. 1, however, are tax qualified only if they contain certain provisions.

In some cases, these provisions work in consumers' favor -- by establishing national standards that can protect you from inferior LTC coverage. In other cases, however, they might make it easier for insurers to deny payments.

You sometimes can get better benefits from policies that are not tax qualified. But be warned: The benefits paid by these policies may be counted as taxable income, says Richard Coorsh of the Health Insurance Association of America. That question is currently under review at the IRS.

Younger people who choose tax-qualified policies don't get jTC much of a deduction for the premium they pay -- only $200 this year if you're 40 or less, $375 up to age 50 and $750 up to age The deduction jumps to $2,000 if you're over 60 and $2,500 if you're over 70. (These limits will rise with the medical inflation rate.)

To get this deduction, you have to itemize on your tax return. You can write off only those medical expenses (including the LTC premium deduction) that exceed 7.5 percent of your adjusted gross income.

Not many younger people spend that much. So as a practical matter, they may not get the write-off at all.

If you're self-employed, there's a different rule on deductibility. You can probably write off 40 percent of your premium this year as a business expense. That amount gradually rises to 100 percent by 2007.

Formerly, you couldn't get this tax break if you were covered under another health-insurance policy -- for example, as a dependent on your spouse's plan.

But under the new law, insurance dependents can buy their own long-term-care policies and take the deduction, if LTC benefits aren't also covered by the spouse's plan, says Peter Elinsky, tax partner of KPMG Peat Marwick in Washington.

If you're already incurring long-term-care expenses -- in a nursing home or for home care -- and are paying out of pocket, that money is also deductible as a medical expense.

Older people with modest incomes and high, uninsured long-term-care expenses are likely to see significant tax relief. In fact, it may pay you to itemize rather than take the standard deduction, says Scott Holladay, director of advocacy services for CareLink, the Central Arkansas Area Agency on Aging.

So save every bill -- including driving to the doctor (at 10 cents a mile), bills from therapists, amounts paid for special equipment, prescription drugs, home-care services and anything else that might be relevant.

If you hire a personal aide rather than an agency to provide home care, the cost may be deductible. But you'll have to pay Social Security and other employment taxes.

Long-term care expenses qualify for the deduction if:

You, your spouse or a dependent is expected to be "chronically ill" for at least 90 days, according to a doctor, registered nurse or licensed social worker.

The expenses are part of a specified plan of care.

They're not reimbursed by insurance.

The services are not performed by a relative, unless that relative is licensed to do so.

You're not also taking the dependent-care credit on your tax return (this credit is available to workers caring for an incapacitated person at home).

There's a complication, however. Long-term-care insurers will have to issue 1099 tax forms for the benefits they pay under every LTC policy, says Martin McBirney, director of strategic initiatives for the marketing and consulting group, LTC Inc. of Seattle.

It's not clear how these are going to be handled on tax returns. We all await enlightenment.

Pub Date: 12/01/97

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