Can Your Clients Deduct LTCi Premiums This Year?

Ask any small business owner about their biggest frustrations, and often, taxes is one of them—not to mention the myriad regulations they must comply with on a daily basis.

Various kinds of taxes—license fees, gross receipts tax in some municipalities, federal, state, FICA, FUTA and even ACA-related taxes—affect small businesses, depending on the size of the business and cost of health care they provide to employees. And that’s only a partial list. When a business can use the tax code in their favor to lower their taxes and accomplish an important objective, it’s an opportunity they shouldn’t pass up.

Most working people are not able to deduct their medical expenses, including long-term care insurance (LTCi) premiums, because their expenses don’t reach mandated thresholds: To deduct premiums, total health care expenditures must exceed 10% percent of adjusted gross income (AGI) for taxpayers that itemize. But if you’re 65 or older, you can still use the current 7.5% threshold through the end of 2016.

The good news: If you’re a business owner or self-employed, you may be able to deduct your LTCi premiums. For example, a self-employed person can deduct 100% of their LTCi premiums, up to the amounts listed below. They can also deduct the total insurance premiums they paid for their spouse or other dependents, up to the same limits. As a result, they don’t have to meet the current 10% AGI threshold in order to take this deduction. Of course, a business or self-employed person cannot deduct more than they earn.

A self-employed individual can take the business tax deduction on LTCi premiums on Schedule C (Form 1040), the Profit or Loss from Business Form, Schedule C-Ez (Form 1040) or the Profit or Loss from Farming Form, Schedule F (Form 1040). A shareholder holding more than 2% of the stock in an S Corporation may claim the costs of premiums for themselves, their spouse and their dependents, as long as they receive wages from the corporation reported on a W-2 Form.

Source: IRS Revenue Procedure 2015-53

Independent insurance agents should consider purchasing LTCi on two levels: for themselves and their employees, and for their clients. Many business owners find themselves in a total marginal income tax of at least 40%, and upon receiving payouts for eligible LTCi reimbursements, they are income tax-free.

This is an extremely tax-efficient way to pay for and receive LTCi benefits. Take advantage of the many life-health MGAs that help independent agents with proposals and underwriting. Considering the tremendous potential expense of long-term care, agents should have the conversation with their clients and review their own situation.

Dave Evans is a certified financial planner and an IA contributor.