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Long-term care insurance deductibles for 2012

The limits on tax deductions for long-term care insurance (LTC) premiums will rise slightly for policies purchased next year, the Internal Revenue Service has announced.

Although the deductible-limit increases from this year to 2012 will be modest, the tax advantages of long-term care insurance overall can provide significant savings, especially for older retirees and small-business owners, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance.

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LTC deductions

2012 federal tax deduction limits for individuals, according to age

AGE                          2012

40 and under             $350

41 to 50                    $660

51 to 60                    $1,310

61 to 70                    $3,500

Over 70                     $4,370

Source: IRS Revenue Procedure 2011-52 (2012 limits) and 2010-40 (2011 limits)

The federal government has offered tax incentives for purchasing long-term care insurance for 15 years to encourage people to plan for their needs as they age. The goal is to help create affordable  long-term care insurance for the aging. Each year, the IRS increases the federal deductibility limits to keep up with inflation. (Some states also offer long-term care insurance tax incentives.)

Long-term care consists of a variety of services. It provides coverage for assistance with daily living tasks, such as help with bathing, eating and getting to the bathroom. Medicare and private health insurance plans usually don't cover these services.

You can count long-term care insurance premiums as medical expenses and can deduct them if all your medical expenses exceed 7.5 percent of adjusted gross income. Younger and middle-aged people usually don't meet the 7.5 percent threshold, especially if they have standard health insurance, Slome says. However, retirees living on limited incomes and facing large medical expenses often do meet the threshold.

The amount you can deduct for long-term care insurance rises with age. Next year, for instance, individuals 40 and younger can count up to $350 in premiums as medical expenses, while people over 70 can count up to $4,370 in premiums as medical expenses on their taxes.

The tax savings for small businesses are especially valuable.

"For a small business structured as a ‘C’ corporation, the cost of long-term care insurance can be fully tax-deductible, even for spouses, and the business can establish a very specific group to be covered under a corporate paid plan," Slome says.

A corporation can maximize deductions by purchasing accelerated premium plans, which allow it to fully pay for the insurance in a relatively short amount of time, such as 10 years. That way, the insurance is paid up by the time the owners retire, Slome says. The American Association of Long-Term Care Insurance provides further information on tax deduction rules on its website.

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