1 Tax Deduction You're Probably Overlooking

Preparing and filing taxes is a drag. What's worse is missing a hefty tax deduction. Here's one deduction that will potentially save you thousands of dollars. You don't want to overlook it.

Significant savings
The government offers tax incentives to encourage Americans to take responsibility for their future long-term care needs. You can possibly write off medical expenses, including long-term care insurance premiums, if you itemize deductions. For the 2013 tax-filing year, you may deduct only the amount by which your total medical expenses exceed 10% of your adjusted gross income or 7.5% if you or your spouse is 65 or older. 

The amount of qualified long-term care premiums you can include as medical expenses is limited up to the following amounts:

Sources: IRS and American Association for Long-Term Care Insurance. 

If you own a long-term care insurance policy, don't forget this potential tax deduction. On the other hand, if you don't own a policy, this tax savings serves as a big reason to consider one.

Long-term care insurance 101
Long-term care insurance typically covers out-of-pocket expenses that result from home care, assisted living facilities, and nursing homes. But like all health care, long-term care isn't cheap. The national median cost of care in an assisted living facility currently stands at $3,450 per month. A private room in a nursing home runs $84,000 annually. Still worse, the cost of long-term care has increased nearly 5% annually over the past five years.  

Advances in medicine allow us to live longer but have increased our need for care and extended the number of months, or years, that we'll probably need long-term care. Currently, our four options when facing a long-term care event include spending down our assets, relying on family, going on Medicaid (not to be confused with Medicare), and tapping into long-term care insurance benefits.

A long-term care insurance policy creates a pool of money for your future use. How big the pool is depends on the size of the policy; the larger the pool, the bigger the premiums. How fast the pool is drained depends on what type of long-term care is required and how often it's needed.

Changing industry landscape
Many long-term care insurers eager to acquire market share purposefully underpriced premiums in the past. Due to rising health care costs and unpredictable claims patterns, they couldn't meet their claims-paying obligations over time. As a result, they continually increased premiums and were eventually forced to sell their policies to other insurers. In fact, at least half of the top 20 writers of individual coverage five years ago have stopped selling new policies, including Prudential Financial (PRU 1.76%) and MetLife (MET 1.66%). Meanwhile, Genworth Financial (GNW 1.87%) and Manulife Financial (MFC 0.61%), both considered conservative underwriters and continually highly rated by consumers, remain in the individual market.

With the recent exodus of big insurers and more stringent underwriting that existing insurers require, long-term care insurance is getting harder and more expensive to obtain. This is long overdue and will only benefit the industry and policyholders.

Foolish final thoughts
If you own a long-term care insurance policy, don't forget this potentially huge tax deduction. If you don't own a policy, perhaps this tax savings serves as another reason to consider one. When shopping around for policies, look for insurers with tenure in the business, exhaustive actuarial data, solid financials, and significant business in your state. Keep in mind that long-term care insurance is not a one-size-fits-all solution. It makes a lot of sense for some individuals, and for others it doesn't.