In the August 24th post we discussed the options for long-term care needs and policies. Did you know you may receive tax benefits on the premiums you pay? On your federal return you may be able to deduct the premiums paid. In many states, including New York, you may be eligible to receive a tax credit. If you are paying for nursing home expenses out-of-pocket, you may be eligible to receive the New York Nursing Home Assessment Credit.
You can deduct the premiums paid for long-term care insurance on your federal tax return. You must be able to itemize. The premiums and medical expenses must be greater than 10% of your adjusted gross income (AGI). For 2020, the deduction is between $5,430 and $430 depending on your age on Dec 31st.
For example, Ted is single, age 70 and pays long-term care premiums of $4,500 per year. Ted has no mortgage and charitable contributions of $3,000. He has property and state income taxes of $10,000 per year. Ted’s AGI is $50,000. In 2020 the standard deduction amount for a single filer is $14,050. Ted has an additional $3,000 of medical expenses. For Ted to deduct his long-term care premiums of $4,500 he needs to exceed 10% of his AGI or $5,000. Ted’s total medical expenses and long-term care premiums total $7,500 less the 10% of his AGI bring his deductible medical expenses to $2,500 ($7,500 – $5,000 = $2,500). Add $2,500 of deductible medical expenses to his charitable contributions of $3,000 and property and state tax of $10,000 gives Ted $15,500, which is $1,450 over the standard deduction amount of $14,050. Ted can itemize due to his long-term care premiums paid, reducing his taxable income and his tax liability.
Many states have a long-term care credit. New York State has a long-term care credit, that you can claim whether you itemize on the federal return or not. This is a non-refundable credit, meaning it will only reduce your tax liability down to $0. In 2020, residents and part year residents with AGI under $250,000 are eligible for a credit of 20% of long-term care premiums paid. The credit is capped at $1,500.
For example, Mary who is age 75 and pays long-term care premiums of $8,000 per year. Mary’s AGI is $100,000 making her eligible for the credit. 20% of $8,000 is $1,600. Mary will receive the capped amount of $1,500. Compare Mary’s tax situation to Fred’s situation.
Fred is age 67 and is a retired New York State worker. Fred receives a NYS pension of $45,000 and Social Security of $23,000. Fred’s long-term care premiums are $5,800 per year. 20% of $5,800 is $1,160. New York State does not tax state pensions nor Social Security. This means Fred’s NYS AGI $0. Since Fred has no tax liability, he does not get credit for his long-term care premiums paid. Fred can carry the eligible credit amount forward to use the credit if he has taxable NYS income in the future.
New York State also has a Nursing Home Assessment Credit. This is a refundable credit if you paid the nursing home assessment imposed on a New York nursing home. Typically, the amount of the assessment is on the billing statement or other statements provided to a resident of the nursing home. You could claim the credit only if you actually paid the assessment. If your mother is in a nursing home and you paid the assessment on her behalf, then you can claim the credit. If your mother paid the assessment, then your mother is the only one entitled to claim the credit. If you are a nursing home resident with a long-term care policy that you have assigned to pay the nursing home, you may claim a credit for the amount of those insurance benefits that represent the assessment payment. You are not eligible to claim the credit for any part of the assessment paid directly to the nursing home by a health insurance policy, public funds such as Medicaid or Medicare, or paid by a trust or other entity.
The credit is equal to the 6% base-rate portion of the assessment that you directly paid during the year. It is not the amount of total care expenses paid. For example, if you paid a total of $116,800 for nursing home care including $110,000 for total care expenses and $6,800 for New York State assessment, the amount of credit allowed would be $6,600 ($110,000 total care expenses x 6% = $6,600).
In the August 24th post hybrid policies were discussed. For the federal deduction and New York State Long-term Care Credit the hybrid policies do not usually qualify. To determine if your policy is a qualified long-term care policy, you can go to IRS.gov and look for Revenue Code 7702B. Qualified long-term care policies for New York State follow the same Revenue Code requirements and have been approved by the New York State Superintendent of Financial Services under section 1117(g) of the Insurance Law.
Working with your financial planner, attorney, and tax advisor can help you navigate whether you need a long-term care policy, including the costs and tax advantages to help you make an informed decision. Planning for your future is not easy. A long-term care policy can give you and your loved ones peace of mind. It can provide a way of paying for care without liquidating all your assets.