November 28, 2000
LONG-TERM CARE INSURANCE PREMIUMS - TAX DEDUCTIONS
By: Judith Lohman, Chief Analyst
You asked if there is a credit or deduction against the state income tax for long-term care insurance premiums. You also asked if there is a federal tax credit or deduction, whether it is true that the deduction can be taken only on Form 1040 and not on Form 1040A, and if so, why.
There is no credit or deduction from the state income tax for long-term care insurance premiums. The only credit the state allows against the tax is a credit for property taxes paid on a primary residence or a motor vehicle. Federal law allows taxpayers to deduct premiums (up to specified limits) paid for qualifying long-term care insurance contracts, if they itemize their deductions. In order to take advantage of the deduction, a taxpayer must file Form 1040. Taxpayers who file Form 1040A cannot take the deduction because 1040A is a simplified form.
FEDERAL LONG-TERM CARE TAX DEDUCTION
A taxpayer who itemizes deductions may deduct premiums for qualified long-term care insurance. Deduction limits vary according to age as follows:
40 or under
41 to 50
51 to 60
61 to 70
71 and over
These limits apply to premiums for each person.
Qualified Long-Term Care Insurance
In order to qualify for a deduction, the insurance must cover qualified long-term care services. A qualifying contract must:
1. be guaranteed renewable;
2. not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;
3. provide that refunds (other than those given on the death of the insured or complete surrender or cancellation of the contract) and dividends under the contract be used only to reduce future premiums or increase benefits; and
4. not generally pay or reimburse expenses incurred for services or items that would be reimbursed by Medicare, except when Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.
The policy must cover necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitation services and maintenance and personal care services required by a chronically ill person and provided by a licensed practitioner. A “chronically ill person” is one who a health care practitioner has certified within the past 12 months as either (1) unable for at least 90 days to perform at least two activities of daily living (such as eating, bathing, dressing, etc.) without substantial help or (2) requiring substantial protective supervision because of severe cognitive impairment.
USING FORMS 1040 AND 1040A
In order to take the long-term care premium deduction, a taxpayer must itemize deductions. Certain federal taxpayers who do not wish to itemize fully may use a simplified form, called 1040A. Taxpayers may use Form 1040A if:
1. their taxable income is under $50,000;
2. their income comes only from wages, salaries, tips, taxable scholarships and fellowships, interest, ordinary dividends, pensions, annuities, IRAs, unemployment compensation, and taxable Social Security or railroad retirement benefits; and
3. they owe only the taxes from the Tax Table, alternative minimum tax, and any advance earned income payments.
Form 1040A allows filers to make income adjustments only for contributions to individual retirement accounts and student loan interest and to claim only the following credits:
1. child and dependent care expense credit,
2. earned income tax credit,
3. adoption credit,
4. elderly or disabled credit,
5. education tax credits, and
6. additional child tax credit.
Taxpayers must use Form 1040 if they want to itemize deductions or claim tax credits or income adjustments other than those allowed on Form 1040A. They must also do so if they:
1. have taxable income of $50,000 or more;
2. have certain kinds of income such as capital gains, unreported tips, or certain nontaxable or self-employment earnings; or
3. owe household employment taxes.