U.S. Care Logo


Tax-Qualified vs. Non-Tax-Qualified Pros and Cons

What You Should Know About Long-Term Care Taxation
Overview
You may have caught wind of the debate going around concerning long-term care and taxes—it can be a confusing subject. There are two types of long-term care policies you can purchase: Tax-Qualified and Non-Tax-Qualified. You may be wondering what kind of policy you should buy, what is required to receive a tax deduction, and how Tax-Qualified policies really differ from Non-Tax-Qualified policies. Here are some basics that you should know about tax qualification and how it can affect your long-term future.

Legislative Background:
The Health Insurance Portability and Accountability Act of 1996 set forth some rules for income taxation of long-term care insurance policies.
The Internal Revenue Code Section 7702B, added by the 1996 tax legislation, spells out the requirements that a long-term care insurance policy must meet in order to be considered a "Qualified" policy.

Tax-Qualified Policy
A Tax-Qualified policy can be eligible for a tax deduction of your policy's premiums and benefits. Form 1099-LTC states that "amounts paid under a qualified long-term care insurance contract are excluded from your income."
In order to qualify for the tax deduction you must be certified by a health professional as having a chronic illness that will last for a minimum of 90 days.
You must be unable to perform two out of six, or in some cases two out of five, Activities of Daily Living (ADLs). 
Cognitive impairment must be severe and require substantial supervision. 
Medical necessity, injury or sickness probably will not qualify you to receive benefits.
If you claim this deduction you must itemize your medical expenses, subject to age-related limits. 
To deduct medical expenses, your out-of-pocket expenses must be itemized and exceed 7.5% of your gross adjusted income. 
Refunds of premiums at death or cancellation are taxable income if the premiums were deducted from income. 

Non-Tax-Qualified Policy
Benefits received on or after January 1, 1997 will not be taxed, even if they: a) exceed the cost of your care and b) cover expenses that are not qualified Long-Term Care services.
Does not require a 90-day certification by a health professional in order to access benefits.
Patients whose period of care lasts for less than 90 days still receive benefit payments. Includes medical necessity as a trigger.
Does not have a minimum Activities of Daily Living (ADL) restriction. 
There are no caps or limitations on benefits.
You do not need to itemize your tax return. 
No portion of your premium is deductible.

Tax-Qualified Plans
Pros
Cons
Premiums paid by individuals are deductible for those who itemize medical expenses, subject to age-related limits. A condition must be certified by a health care professional to be expected to last for 90 days in order to qualify for benefits.
  Cognitive impairment must be severe and require substantial supervision.
  A person must be unable to perform two out of six, or in some cases two out of five, ADLs. Medical necessity, injury or sickness probably will not qualify an insured to receive benefits.
  Refunds of premiums at death or cancellation are taxable income if the premiums were deducted from income.

Non-Tax-Qualified Plans
Pros
Cons
Benefits received on or after January 1, 1997 will not be taxed, even if they: a) exceed the cost of your care and b) cover expenses that are not qualified Long-Term Care services. No portion of your premium is deductible.
There are no caps or limitations on benefits.  
Benefit triggers are more liberal, including a "medical necessity" benefit.  
Patients whose period of care lasts for less than 90 days still receive benefit payments.  
You do not need to itemize your tax return.  

 

Back to Long-Term Care and Tax Legislation

Taxing Questions about Long-Term Care
 




Questions or comments regarding this website? E-mail Webmaster.

Revised  .