As the end of year nears, many begin thinking of their 2020 budget, finances, and taxes. There are better ways to pay for your Long-Term Care insurance (LTCI) premiums that just using your checking account. Some involve paying for premiums with tax-free money or deducting premiums on your taxes. Consider these four tax-friendly ways to pay your LTCI premiums.
Pay LTCI Premiums with Tax-Free Withdrawals from an HSA
If you have a Health Savings Account (HSA), did you know you can pay a portion of eligible LTCI premiums with tax-free money in your account? The amount you can withdraw is based on your age up to annual IRS limits. You can also withdraw up to the following limits for your spouse’s coverage.
If your employer offers a high deductible health plan with HSA, consider your options. HSAs can be a great way to save for current and future eligible health care expenses, including a portion of LTCI premiums now and into retirement. For more information about HSAs and limitations, review IRS Publication 969.
Deduct Your LTCI Premiums as a Medical Expense
You may qualify to deduct a portion of your LTCI premiums as a tax-deductible medical expense. The same age-based limits apply to these deductions as they do for HSA withdraws. Keep in mind, if you already took a tax-free withdrawal from your HSA to pay LTCI premiums, you cannot deduct the same expense as medical expenses.
Medical expenses may be deducted if they exceed 10% of your adjusted gross income (AGI) or over 7.5% of your AGI if you are age 65 or over. For more information, review IRS Publication 502.
“You may qualify to deduct a portion of your LTCI premiums as a tax-deductible medical expense.”
Annuity Tax-Free Transfer
If you have an annuity, you can transfer money tax-free to pay for LTCI premiums or transfer funds to another annuity with an LTC rider. This transfer is referred to as a 1035 exchange. Funds must be directly transferred from an annuity to pay for premiums to enjoy the benefits of the tax-free transfer. If you withdraw money from the account to pay premiums, you will be required to pay income taxes on gains. Your LTCI carrier can help with 1035 exchange for tax-free transfers.
Permanent Life Insurance Tax-Free Transfer
Another tax-free exchange option is by using a cash-value Life insurance policy to pay for LTCI premiums or transferring to a hybrid Life insurance policy with LTC rider. The tax-free funds come from the policy’s cash value or policy dividends. This can be a great option as you get older and don’t need as much Life insurance coverage.