Long term care insurance can be expensive. Fortunately, the government recognizes the importance of long term care insurance to avoid overwhelming the Medicaid program and provides some income tax relief in the form of limited deductions for premiums paid.
In order to deduct premiums paid for long term care insurance the policy must be a "qualified policy" as defined by the IRS. A qualified policy is one issued after January 1, 1997 that adheres to certain regulations established by the National Association of Insurance Commissioners. Policies purchased before January 1, 1997 may still be treated as "qualified" if they are approved by the insurance commissioner of the state where it was sold.
Once you have established that your long term care insurance policy is a "qualified policy" you can then review the deductibility limits. Long term care insurance premiums are treated as un-reimbursed medical expenses for income tax purposes. In order to deduct these premiums, the total of your un-reimbursed medical expenses must exceed 7.5 percent of a taxpayer's adjusted gross income. For the purpose of reaching the 7.5 percent threshold you include the lesser of the premium you actually paid or the ceiling below.
If you are 40 or under on 12/31/08, the maximum portion of your long term care insurance premium considered "health insurance premiums" is $310.
If you were between 41 and 50 on 12/31/08, the maximum portion of your long term care insurance premium considered "health insurance premiums" is $580.
If you were between 51 and 60 on 12/31/08, the maximum portion of your long term care insurance premium considered "health insurance premiums" is $1,150.
If you were between 61 and 70 on 12/31/08, the maximum portion of your long term care insurance premium considered "health insurance premiums" is $3,080.
If you were over 70 on 12/31/08, the maximum portion of your long term care insurance premium considered "health insurance premiums" is $3,850.
For example, if you are 62 years old at the end of 2008. You can include $3,080 or the total amount you actually paid in premiums for qualified long-term-care insurance — whichever is less — in your medical expense pot. If the total pot exceeds 7.5% of your adjusted gross income, you can deduct the excess on your Schedule A.
Remember the rules are different for business owners, so check with your accountant.