Are Long-Term Care Expenses Tax Deductible?
In 2019, the National Center for Health Statistics released a study on long-term care. They studied 65,600 long-term care service providers, including day centers and nursing homes. The study found that these facilities served an estimated 8.3 million people.
Unfortunately, all of these necessary services come at a cost. While long-term care insurance (as well as disability insurance) is available, it’s sometimes insufficient to cover all costs. The insurance premiums themselves can also be quite costly. These costs can quickly eat into a retirement or other savings account for those on a fixed income.
Luckily, long-term care comes with a few tax benefits. However, there are some limitations and qualifications. So we’re reviewing what deductions are available and how to receive them to help you understand whether you qualify and, if so, how to file for them.
What does long-term care cost?
No matter how you slice it, long-term care is pricey. Patients often require extensive medical care and help with daily activities. Many patients require assistance with mobility, feeding themselves, and using the restroom. Expenses include many related services, including personal and medical care and social services.
Of course, daily care such as this can quickly add up. Over the long term, this can lead to astronomical medical bills.
On average, long-term care costs over $4,000 a month. According to Statista, the cost of long-term care can reach up to $108,405 per year. Of course, that depends on the type of medical care you receive. But, even on the low end, annual care can cost $20,280. That’s almost half of the current median income—about $54,000.
Are long-term care expenses deductible?
Long-term care tax deductions can help offset some of the medical expenses. There are two primary avenues for receiving a deduction. You can claim a deduction against unreimbursed funds or your long-term care insurance premiums.
The primary ways to deduct long-term care expenses on your tax return are:
Some healthcare policies offer reimbursement plans when you pay for services out-of-pocket. You might qualify for a deduction if you’ve paid for such services without reimbursement. However, you must meet a few qualifications to claim the deduction.
So, which long-term care expenses are tax deductible? Here are some of the most important qualifications:
- Must have a qualified long-term care plan
- Patient must require care for 90 days or more
- Care must be medically necessary
- Services must be performed or prescribed by a licensed health care practitioner
- Patient must be “chronically ill,” i.e., their illness must impair at least two activities of daily living (eating, bathing, etc.)
- For severe cognitive impairments, the care received must directly assist with their disability or the direct threats to their health associated with it
Long-term care insurance deduction
Some long-term care premiums are deductible. However, this option is a bit more limited. For one, you can only deduct the premiums if your insurance plan only covers long-term care. You can’t deduct your premiums if your policy includes any other type of insurance, such as a typical health or life insurance plan.
Eligibility also requires premiums to exceed 7.5% of your adjusted gross income (AGI). The deduction also comes with different caps depending on your age.
The IRS lists other insurance policy qualifications to earn the deduction. To be eligible, the policy must:
- Be guaranteed renewable
- Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed
- Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits
- Not pay for or reimburse expenses that would be reimbursed under Medicare.
Insurance policies purchased before January 1, 1997, might automatically qualify. Be sure to check with a financial advisor or tax professional to ensure you’re eligible.
If you’re self-employed, you can claim the deduction to adjust your taxable income without itemizing your return.
How do I claim the deductions?
In addition to the limits already listed, there are a few additional requirements when filing the claim.
First, you must itemize deductions when filing your taxes. However, please keep in mind that recent tax changes have increased the amount of the standard deduction. So, while itemizing can help you receive the long-term care deduction, the standard deduction might net you a bigger return. A financial advisor or tax professional can help determine which option works best for you.
As with the insurance deduction, the expenses you’re deducting must exceed 7.5% of your AGI.
If you’re an adult child of a long-term care patient, you can also file for the deduction. To qualify, you must be able to prove that your parent is a dependent.
Impacts by age
Once you’ve retired, you’re probably working on a fixed income and a strict budget. As you grow older, your retirement savings tend to tighten. A long-term healthcare deduction might be an increasingly helpful option as time goes on.
There’s an added benefit for those who qualify for the long-term care insurance deduction. As you get older, the deduction cap goes up. Much like Social Security benefits, these caps go up yearly, meaning you can include a higher portion of your premiums in the deduction with each increase.
For 2023, the long-term care insurance deductions by age are:
- $480 for those 40 and under
- $890 for those 41 to 50
- $1790 for those 51 to 60
- $4770 for those 61-70
- $5960 for those 71 and older