reducing federal taxes with long term care insurance premiu
I read of 3 ways to reduce taxes on ltci premiums: using a health savings account ,medicare medical savings account and using the interest earned on non-qualified annuities(fixed?) to pay the ltci premiums. Which of these would have the greatest affect on reducing the federal tax liability? thank you. pablolo
Permalink Submitted by Alan Spross on Mon, 2011-06-27 17:59
Considering just the premiums for a qualified LTC contract, the simplest way to reduce taxes requires being able to itemize medical expenses (excess of 7.5% of AGI). Premium deductible amounts for LTC insurance are limited in various tiers based on age.
While a distribution from an HSA to pay for the premiums is a qualified tax free HSA distribution, there is no additional itemized deduction because the HSA contribution itself was deductible and the distribution is tax free for qualified medical expenses. Therefore, it is already double tax free. My guess is that the MSA rules are the same.
The new annuity 1035 exchange effective in 2010 allows you to do a partial 1035 from your NQ annuity to pay for a qualified LTC contract. The annuity distribution is tax free, but again, there is NO itemized deduction allowed for the LTC purchase. You would probably have to do one of these exchanges each year to pay the current LTC premium. Would have to research further to determine if your annuity gains are included in the 1035 pro rated, or if the investment in the annuity is applied before any gains.
To get an immediate tax deduction, you would either have to pay the premiums out of taxable funds (and of course qualify to itemize), or make a deductible HSA contribution and then take a qualified distribution. If you can still contribute to an HSA (ie have qualified HDHP coverage), this would be better since you do not have to itemize to get the HSA deduction. Note: Some states such as CA do not allow an HSA deduction on the state form.
Permalink Submitted by paul lolicata on Wed, 2011-06-29 04:01
thank you alan for your input. I itemize my taxes(real estate taxes and interest,etc.) because of my age bracket I will be able to deduct about $3100 in 2011 or rather add that to my medical expenses. from my ltci premiums.