|
|
|
|
| The Basics | Let Uncle Sam help with your old-age care
|
Insurance to cover the costs of a nursing home or assisted living is increasingly crucial and expensive. Premiums are deductible, though the rules are complex.
By Jeff Schnepper
I know. You truly believe youre going to live forever. But that may be a problem. The longer you hang on, the more likely youre going to need assisted living. That can cost big bucks.
According to insurance consultants Christopher and James Bell of the Mobile, Ala., firm of Branch, Bell & Associates, The need for long-term care touches eight out of 10 families in the United States. Your risk is higher than destroying your car in an accident, or even having a fire at home.
And theres the cost. Frank Keating, president of the American Council of Life Insurers, reports that daily visits by a home health-care aide currently cost more than $16,000 annually; a nursing home, more than $55,000. Those expenses are projected to reach $68,000 and $190,000, respectively, within the next 30 years.
And you dont have to be old to worry about long-term care. More than 35% of the long-term care benefits paid in 2001 went to those under the age of 40.
Without some sort of long-term-care insurance, these extraordinary expenses for a nursing home or professional, 24-hour home care can be catastrophic. They can wipe out your retirement savings and decimate your investments.
If you dont have long-term care coverage of some kind, says Rep. Earl Pomeroy, D-N.D., youve got to impoverish yourself for Medicaid to pay for prolonged care.
Get the IRS to help you out
First, see if you fall into either of these categories: - Your assets total no more than $250,000. If thats the case, you would probably would find the payments difficult and would soon qualify for Medicaid if confined to a nursing home.
- Your assets total more than $1.5 million. If youre that fortunate, you probably can bear the cost of nursing-home care yourself.
But lets say you fall into the gap between $250,000 and $1.5 million. Heres where the IRS can help out.
Currently, eligible premiums for long-term care insurance can be used as medical deductions. To take the tax benefit, you normally have to itemize your deductions. And you can deduct only those expenses, including eligible long-term care premiums (which can run from a few hundred dollars a year to many times that), that exceed 7.5% of your adjusted gross income. Thats your total gross income less any above the line deductions.
If your adjusted gross income is $100,000, your first $7,500 in medical expenses wouldnt count. Plus annual eligible premiums are limited by your age or the age of anyone else whose premiums youre paying, including your spouse and dependents. Heres what the limits are for 2003:
| Deductible long-term care premiums | | Age | Maximum premium deduction for 2003 | | Up through age 40 | $250 | | 41 through 50 | $470 | | 51 through 60 | $940 | | 61 through 70 | $2,510 | | 71 and older | $3,130 |
|
You might think these "eligible" premiums could be paid somehow on pretax basis. Unfortunately, long-term care is specifically excluded as a benefit under flexible spending accounts, which let workers put money aside before taxes for specific benefits such as child care, orthodontia and the like.
But there may be another way to get around this using a newer form of benefit known as a health-reimbursement arrangement. Also known as a defined-contribution plan or a personal-care account, it lets an employer fund an account that repays an employee for unreimbursed medical expenses.
Health-reimbursement arrangements were created by the IRS rather than Congress. Im not aware of any specific prohibition against long-term care benefits. They were designed to cover medical expenses. The rulings Ive seen have been liberal in their interpretation of what constitutes a medical expense.
But the IRS might view them as similar to flexible accounts. So, the question becomes: How aggressive do you want to get?
Get your boss to pay
Alternatively, if your employer pays your long-term care premiums directly, thats a tax-free employee benefit. The employer can pay for you and your dependents. Your employer gets the deduction, and you pay no tax on the benefit. Theres no limit on what your employer can pay. Tax free is always better than tax deductible. All you have to do is convince your employer.
The self-employed see a big break
If youre self-employed, you can deduct as much as 100% of your eligible premiums above the line without any reduction. They count as part of your health-insurance deduction. This deduction is limited to your net income from the business.
If youre a highly paid executive or own a regular corporation (called a C-corp by the tax professionals), you have a special opportunity to take advantage of our tax code.
Remember, the owner is also an employee of the corporation. So, 100% of the premiums paid by the corporation would be deductible. And none of those premiums would be defined as income to the employees. No limit on what the employer can pay. Nothing different from what we discussed above.
Heres the kicker: With most employee benefits, all eligible employees must be covered. And the IRS tells you which employees must be eligible.
But, thats not true for long-term care. This employee benefit can be offered on a fully discriminatory basis to favored employees. Actually, a business owner can choose to give this perk just to himself and his family.
For those of us without our own corporations, keep an eye on a bill introduced in the House in May called the Long Term Care and Retirement Security Act. It calls for a phased-in, above-the-line deduction available to all taxpayers.
Under the bill, 25% of your premiums could be deducted from 2003 through 2005. The deduction would go to 35% in 2006, 65% in 2007 and 100% in 2008 and after.
The bill has not yet been passed. But, considering the number of aging baby boomers, Congress should be doing anything it can to encourage private medical funding.
|
|
|
|
