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Long-Term Care Relief

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By Robert Brokamp (TMF Bro)
August 5, 2002

Earlier this summer, the House passed The Improving Access to Long-Term Care Act of 2002 (H.R. 4696). The Act allows a portion of long-term care insurance premiums to be deductible, as well as an additional personal exemption to those who provide home health care to dependents. If it passes the Senate, the bill will become law.

In a time when the budget surplus is just a fond memory, Uncle Sam isn't providing tax relief out of avuncular benevolence. As the baby boomers retire and the over-65 population doubles over the next few decades, the price tag of elderly care will become a national crisis. The average annual stay in a nursing home costs $56,000, a bill many can't afford. Enter Medicaid, the government-funded health care safety net for the poor. To prevent overtaxing the system in the future, Congress is trying to come up with ways to encourage citizens to obtain private insurance.

The deduction allowed by the House this summer is a step in the right direction, but just a small step. Here are the pertinent points:

  • This is an "above-the-line" deduction. In other words, the expense can be deducted even if the taxpayer doesn't itemize.

  • The deduction is available only to single tax filers with an adjusted gross income (AGI) between $20,000 and $40,000, and joint filers with an AGI between $40,000 and $80,000.

  • To be eligible, the taxpayer must be responsible for at least 50% of the insurance premiums.

  • Just a portion of the premium is deductible. For 2003-2005, 25% of the portion paid by the taxpayer is deductible. That percentage will gradually increase to 50% by 2012.

While we're not ones to look a gift deduction in the mouth, this tax break probably won't make or break someone's decision to purchase long-term care insurance. Policies can cost thousands of dollars, and the tax deduction won't necessarily make them affordable.

As pointed out in a CBSMarketwatch article, the income limits mean the deduction will be available only to citizens in lower tax brackets, where deductions are less valuable.

For example, a 65-year-old in the 15% tax bracket would realize about $300 in tax relief from deducting the cost of a $2,300 policy. Nothing to sneeze at, to be sure, but it's probably not enough to encourage people in lower tax brackets to shell out a few grand for insurance. The lifting of the income limits and the full deductibility of premiums would be far more effective.

We are heartened to see Congress recognize the need for Americans to examine their need for long-term care insurance. Do you need long-term care insurance? If you're over 50, don't want your savings to be depleted by nursing home bills, and don't want the government to decide where you spend your final days, you should delve deeper into the topic. You can start with a visit to our Insurance Center.

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