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2012 Tax Qualified Long-Term Care Insurance

2012 Tax Qualified Long-Term Care Insurance

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2012 Tax Qualified Long-Term Care Insurance

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  1. 2012 Tax Qualified Long-Term Care Insurance The information contained in this presentation is provided with the understanding that it is not to be interpreted as specific legal or tax advice. Neither The Corporation for Long-Term Care Certification, Inc. nor any of its employees or representatives is authorized to give legal or tax advice. Individuals are encouraged to seek the guidance of their own personal legal or tax counsel.

  2. Benefit taxability • All benefits paid from a reimbursement policy are considered tax free IRC 7702(a)(2), 7702B(d), 105(b) • Indemnity and cash benefit payments are considered tax free, up to first $310 per day (in 2012) regardless of actual expenses. Benefits over $310/day are taxable unless the actual cost of care received also exceeds this amount IRC 213(d)(10)

  3. Premium deductibility • Qualified LTCi contracts are treated as accident and health plans IRC 7702B(a)(1) • Deductibility of the premium payment depends on the type of taxpayer • Individual • Entity Treasury Regulation 1.461-1(a)(1),(a)(2)

  4. Premium deductions for tax payers filing as individuals, are limited based on age This amount, called the “Eligible long-term care premium,” is considered a deductible medical expense IRC 213(d)(10)

  5. 2012 Eligible LTCi premiums

  6. Individual taxpayer Must file an itemized tax return: Schedule 1040 Schedule A Individuals may deduct eligible LTCi premium, but only to the extent that the eligible premium, combined with other unreimbursed medical expenses, exceed 7.5% of their AGI IRC 213(d)(10) (The medical deduction threshold increases to 10% of AGI in 2013 as a result of health care reform.) Eligible premium is based on the age of the individual at the end of the taxable year With joint policy, each spouse claims own eligible premium

  7. …continued… Eligible premium can be paid tax free from a MSA, HSA or HRA without itemization and without being subject to the AGI exclusion IRC 223(d)(2)(A), IRC Notice 2002-45 for HAS Eligible premium is not deductible from an FSA IRC 125(f) Employee cannot pay LTCi premiums with pre-tax funds IRC 125(f) However, employer-paid premiums are excluded from employee income and the benefits paid are not taxable IRC 106

  8. …continued… • After 2009, LTCi premium payments are not deductible as a medical expense, if made from: • cash value of an annuity contract; or • cash surrender value of a life insurance policy

  9. Ed Peters, 61 years old Premium $5,000 Eligible premium for 2012 $3,500 Other unreimbursed med expenses $1,000 Total unreimbursed medical expenses $4,500 AGI $75,000 7.5% threshold $ 5,625 Net deduction $ 0

  10. Self-employed individualsSole proprietors LTCi premium is treated as a self-employed health insurance premium. Paid by the business, entire premium is included as income. IRC 162(1) Eligible premium is fully deductible on Form 1040, as part of the Self-Employed Health Insurance Deduction IRC 162(l)(2)(c), 213(d) However, owner can also deduct the Eligible premium for their spouse and tax dependents IRC 162(l)(2)(c), 213(d)

  11. …continued… Owner can deduct entire premium paid (no limit) for employees from business income on Schedule C, E or F IRC 162(a)(1) Premiums are excludable from employee’s income IRC 162(a)(1) The benefits are tax free IRC7702(a)(2), 7702B(d), 105(b) LTCi is not subject to anti-discrimination rules; the owner can discriminate by class, and take a deduction for himself Treasury Regulation 1.105-5, 1.106-1

  12. Consider… If the owner’s spouse is on the payroll and is a bona fide employee, the spouse’s entire premium is deductible A 10-pay may make sense Some carriers offer a joint policy If the employee spouse or domestic partner owns the policy, and they are both insured, 100% of the premium may be deductible.

  13. Caveat… Employers can deduct tax-qualified LTCi premiums to the extent that they are ordinary and necessary expenses for reasonable compensation paid to employees IRC 162 Frontloading premium, in the form of an accelerated payment option, may cause an audit if the IRS doesn’t believe it meets the “reasonableness” standard The IRS may consider a full non-forfeiture option (return of premium) as a form of deferred compensation

  14. Partnerships Partnerships may treat the payment of premiums as either a guaranteed payment or a distribution If treated as a guaranteed payment, it is reported in box 4 on K-1 and therefore subject to income and self-employment taxes IRC 162(a), 707(c) If treated as a distribution, eligible premium is reported in box 19 of K-1 and is not subject to income and self employment taxes. It may be subject to capital gains tax if the distribution is in excess of partner’s tax basis IRC731(a)(1) Partners deduct eligible premium as Self-Employed Health Insurance on their 1040, whether or not taxpayer itemizes deductions IRC 162(l), 213(s)(1)(D), 213(d)(10)

  15. …continued… • Partnerships can deduct the entire premium paid for bona fide non-partner employees as a business expense IRC 162(a) • The premium is not considered taxable income and the benefit, when paid, is not taxable IRC 106(a), 106-1 • LTCi is not subject to anti-discrimination rules. The partner can discriminate, by class, and take a deduction for himself Treasury Regulation 1.105-5, 1.106-1

  16. Consider… • If a partner’s spouse is a bona fide employee, the spouse’s entire premium is deductible. A 10-pay may make sense, however… • Few partners have their spouse on the payroll, which would be necessary to maximize the premium deduction

  17. S-Corporations: Deductions for >2% shareholders Shareholders may deduct eligible premiums as self-employed health insurance premiums on Form 1040, whether or not the tax payer itemizesRevenue Ruling 91-26 The company can pay the entire LTCi premium and deduct it IRC 162(a) The premium is treated like a guaranteed payment; it is considered part of the shareholder’s salary and is reported on the W-2 and to the IRS on Form 1120SRevenue Ruling 91-26 The shareholder can deduct the Eligible premium as a self employed health insurance premium on Form 1040 IRC 162(l), 213(s)(1)(D),213(d)(10)

  18. …continued… • Corporation can deduct the entire premium paid for bona fide non-owner employees from business expense IRC 162(a) • The premium is not considered taxable income and the benefit, when paid, is not taxable IRC 106(a), 106-1 • LTCi is not subject to anti-discrimination rules. The owner can discriminate, by class, and take a deduction for himself Treasury Regulation 1.105-5, 1.106-1

  19. Consider… Even if the spouse is a bona fide employee, there is no additional tax benefit. Due to the rule of attribution, she is also capped at Eligible premium This is not the case with domestic partners, therefore a 10-pay may make sense for the non-shareholder partner

  20. Limited Liability Companies LLC is a legal filing, not a tax filing A LLC with one owner is considered a sole proprietor, unless otherwise stated A LLC with two or more partners is considered a partnership, unless otherwise stated It is very rare, but an LLC could be taxed as a C-corp Professional Corporations (PC) Treated as either S or C corporations

  21. C-Corporations Company can deduct 100% of actual premium for employees and shareholder-employees, regardless of ownership IRC 162(a) The business can deduct 100% of premiums paid for a shareholder’s spouse and tax dependents, whether or not they are considered bona fide employees IRC 162(l) 162(l)(2)(C), 213(d)

  22. …continued… • Premium is excluded from employee’s income and therefore not subject to tax withholding, social security, Medicare and federal employment taxes IRC 106(a), 105(b) • The premium is not considered taxable income and the benefit, when paid, is not taxable IRC 106(a), 106-1 • LTCi is not subject to anti-discrimination rules. The owner can discriminate, by class, and take a deduction for himself Treasury Regulation 1.105-5, 1.106-1

  23. The information contained in this presentation is provided with the understanding that it is not to be interpreted as specific legal or tax advice. Neither The Corporation for Long-Term Care Certification, Inc. nor any of its employees or representatives is authorized to give legal or tax advice. Individuals are encouraged to seek the guidance of their own personal legal or tax counsel.

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