IRS Reveals 2022 Long-Term Care Tax Deduction Amounts and HSA Contribution Limits

Long-Term Care Insurance has multiple tax advantages available for individuals, self-employed, and businesses. The Internal Revenue Service has released the maximum amount taxpayers can deduct as owners of qualified LTC Insurance.

When the Internal Revenue Service announced its annual inflation adjustments for the tax year 2022, some observers raised their eyebrows that the IRS did not consider higher inflation rates as part of their calculation.  

Long-Term Care Insurance has attractive tax treatment under Section 7702(b). In addition to the potential tax deductibility, proceeds from qualified Long-Term Care Insurance remain tax-free even if you can deduct the premium.

IRS 2022 Tax Deductibility Amounts 

For 2022, the maximum amount of qualified Long-Term Care premiums can be eligible as medical expenses have stayed the same from the tax-year 2021 levels. The one exception is age group 61-70 where there was a slight decrease over 2021.

The deductions apply for self-employed taxpayers, including LLC, PA, S-corporations, and partnerships; the 2% or more owners of these entities can deduct 100% of the eligible (age indexed) premiums paid on their behalf, their spouses, and dependents.

LTC Insurance premiums paid on behalf of non-owner employees, their spouses, and their dependents are generally fully tax-deductible as a reasonable business expense.

Only qualified Long-Term Care Insurance policy premiums are eligible. The age-indexed chart below shows the maximum amount that is eligible for the deduction (per person).

Remember, benefits paid under a qualified Long-Term Care Insurance policy are generally excluded from taxable income. However, some indemnity or cash products that pay a daily or monthly benefit without regard to actual bills are subject to a per diem limitation of $390 a day (down from $400 a day in 2021). Unless there are bills to support the higher amount, benefits over that amount are subject to taxation.

 (Source: IRS Rev. Proc. 2021-45)

Health Savings Accounts

Many employers are offering Health Savings Accounts as a way to lower the cost of health insurance. Many people are unaware that the pre-tax money in a Health Savings Account can be used to pay for qualified Long-Term Care Insurance premiums. 

The reimbursable amount through your HSA is based on the same LTC Insurance allowed tax deduction aged based IRS chart. 

For 2022 there are higher HSA contribution limits available. You can contribute $3,650 for individual coverage for 2022, up from $3,600 for 2021, or $7,300 for family coverage, up from $7,200 for 2021.

For those age 55 and older, you are allowed an additional $1000 contribution for 'catch-up.'

Employer HSA contributions are not treated as taxable income but do count toward employees' annual contribution limit.

What Happens After Age 65?

Once you turn age 65, you can use the funds in the HSA in any way you wish. While you are no longer required to use the HSA funds only for qualified health care expenses and Long-Term Care Insurance premiums, many people will often continue to do so since the money comes out tax-free.

Plus, you get to use the pre-tax money in the account to also pay for your Medicare Supplement. 

Some Hybrid Policies Have Additional Tax Advantages 

Hybrid Long-Term Care Insurance policies have more limited tax advantages, and these plans are life insurance policies or annuities with riders for long-term care. In addition to the long-term care benefit, there is a death benefit. 

As long as the hybrid policy you own meetings federal tax guidelines (IRC Section 7702(b), a portion of the premium dedicated to long-term care may be deductible. The benefits from hybrid policies, like traditional Long-Term Care Insurance, come tax-free.

Not every insurance company that offers this type of product can break out the premium in this way. Check with the insurance company.

Life insurance policies that have a chronic illness rider (IRC Section 101(g), only accelerate the death benefit when a person meets the benefit trigger. 

IRC Section 101(g) riders will sometimes provide accelerated death benefits for terminal illness or chronic illness. The trigger for these products makes it more difficult to receive benefits for extended care. Some of these policies also exclude benefits for cognitive supervision. These plans also lack the consumer protections mandated by tax-qualified Long-Term Care Insurance that meet the rules under Section 7702(b). These plans would not be eligible for tax deductions.

Limited duration, or short-term plans, which provide a one or two-year long-term care benefit, also are not generally deductible. Still, their benefits remain tax-free based on actual expenses being incurred.

Always consult a professional tax advisor to review your specific situation.

Tax if You Don't Own a Long-Term Care Insurance Policy

Several states are considering joining the State of Washington by adding a payroll tax based on total earned income unless you own a qualified Long-Term Care Insurance policy. In Washington, unless you have a policy, the tax will also make you eligible for a very minimal state-provided benefit - click here to read more on the Washington page of LTC NEWS. 

Rate Stabilization Rules for Today's LTC Insurance

Today's Long-Term Care Insurance is not only affordable but is rate stable. Rate stabilization rules are in place in most states. Find your state by clicking here.

Today's policies are priced based on the extreme low-interest-rate environment that adds additional rate stability. The chance of future premium increases in the future is small – read the article by clicking here.

Hybrid Long-Term Care Insurance either has one ‘single’ premium (no rate increase possible) or premiums that can be annualized for life or for a period of years. Hybrid premiums cannot increase by contract.

Health Insurance and Medicare Pay Little or Nothing Toward LTC

Without Long-Term Care Insurance, you will pay for future long-term health care from income and savings, or your family will become caregivers. In some situations, you may have both paid care and family caregivers. Neither option is ideal, and the consequences on family and finances can be enormous. 

Affordable Long-Term Care Insurance safeguards your retirement accounts (401(k) IRA SEP) and other assets as it reduces the stress otherwise placed on your family members.

Traditional health insurance, including Medicare and supplements, will only pay for a small amount of skilled care and nothing toward custodial care which is the type of care most people will require. Medicaid will pay for long-term care services if you have little or no income or assets.

Cost of Long-Term Health Care Depends on Where You Live

Long-term health care is costly and gets more expensive every year. Increasing demand for long-term care services and higher labor costs make the financial impact of future care even greater.

The cost of care services varies depending on where you live, and the type of services you require - Cost of Care Calculator - Choose Your State | LTC News.

Premiums are based on several factors, including the age at the time you purchase coverage, health, family history, and the total amount of benefits being purchased. Premiums for the same benefits can vary over 100% between insurance companies.

Insurance companies must file their products and premiums with the insurance department in each state. No individual agent, agency, or advisor can provide a consumer with 'special deals.'

LTC Specialists Can Be Very Helpful in Finding Affordable Coverage

The best time to obtain coverage is well before your retirement, ideally in your 40s or 50s, to take advantage of low premiums and the most affordable options.

Since there are many options and types of available plans, you should seek a qualified Long-Term Care Insurance specialist to help you navigate these options and help you find the best coverage at the best value. 

You can find a trusted and experienced LTC Insurance specialist by clicking here.

Key Part of Retirement Planning

Long-Term Care Insurance continues to be an outstanding option for American families to safeguard income and assets in addition to reducing future stress and burdens otherwise placed on their family members. 

With the increasing costs of long-term health care placing financial and emotional burdens on American families, Long-Term Care Insurance has become an even more significant part of retirement planning. 

Long-Term Care Insurance pays for all levels of extended care services, including custodial care (help with daily living activities or supervision due to cognitive decline).

LTC Insurance Pays for More Than Just Nursing Homes

Many people think of LTC Insurance as 'nursing home insurance' even though the policies pay benefits for more than just nursing homes. Policies pay for adult day care centers, assisted living facilities, memory care, and perhaps most importantly, in-home care,

In-home care is a professional non-medical caregiving service that allows seniors - others who require ongoing care - to stay in the comfort of their own homes, prolong their active lifestyles and preserve their health for as long as safely possible. 

Studies over the last decade show that nearly half of Americans who reach 65 will need some form of assistance to take care of themselves. Once a person gets past age 40, they start seeing changes in their health, and their bodies begin to deteriorate. At older ages, we start seeing a decline in our cognitive skills as well. 

There is much innovation in the care industry, which benefits the quality of care and the efficiency of caregivers and facilities. The benefits from Long-Term Care Insurance allow policyholders access to the latest quality care options. 

Long-Term Care Affects Families and Finances

With so many people needing long-term care services and supports, you can understand why the federal government, and many states, offer tax incentives to help you purchase a qualified Long-Term Care Insurance policy.

Yet, not everyone is aware of the tax advantages - both federal and some states - making these policies even more affordable to own. 

The problem of long-term health care is both a cash flow issue and a family issue. Owners of Long-Term Care Insurance can access their choice of quality care services, protecting income and assets, preserving lifestyle, and maintaining their legacy. However, it also allows your loved ones to have the time to be family instead of caregivers.

If you are eligible for tax advantages, use them to make your policy even more affordable.