What made 'Mad Men' angry? High taxes
Required minimum distributions from tax-deferred retirement accounts

Deducting long-term care costs

Uncle Sam estimates that 70 percent of older Americans will need long-term care services at some point. 

Eldercare courtesy Evelyn Grace LTDThis isn't for medical care. Rather, long-term care includes services and support to help meet basic personal tasks of everyday life, such as doing housework, shopping for groceries or clothes, preparing and cleaning up after meals, obtaining and taking medications, completing personal hygiene tasks and managing money.

To hire someone to help out with these daily duties is expensive and will only get more so. That's why many people buy long-term care insurance. These policies also can take a bite out of a budget.

But when you do find yourself eventually paying for long-term care, Today's Tax Tip looks at how you might be able to recoup some of those expenses at tax time.

Deductible long-term care services: Many of us will need some help in getting through our daily routines as we age. The tax code allows for certain types of help to be claimed as an itemized medical expense deduction on Schedule A.

However, tax law requires the assistance to be more than I offer my mother during my regular visits to her place. A good daughter or son showing up to help with grocery shopping, taking the dog to the vet or picking up some gardening supplies is commendable, but is not necessarily tax deductible.

The help must be IRS qualified long-term care. And the condition of the person receiving the help that must be taken into account.

Qualified long-term care services, says the IRS, are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative and maintenance and personal care services that are:

  1. Required by a chronically ill individual, and
  2. Provided under a care plan prescribed by a licensed health care practitioner.

For tax purposes, a person is considered chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual:

  1. Is unable to perform at least two activities of daily living (such as eating, toileting, transferring, bathing and dressing) without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity or 
  2. Requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

Deductible long-term care insurance costs: Similarly, premiums paid on long-term care insurance policies are deductible as an itemized medical expense if the contract meets certain conditions.

According to the IRS, the insurance must:

  1. Be guaranteed renewable,
  2. Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
  3. Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and
  4. Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.

Limited policy premium deductions: Even when the policy conditions are met, the amount of qualified long-term care premiums you can count in the medical expenses section of Schedule A is limited based on the policy owner's age.

For 2011 returns, the deducible policy payments are:

  • $340 if age 40 or younger,
  • $640 if age 41 to 50,
  • $1,270 if age 51 to 60,
  • $3,390 if age 61 to 70 and
  • $4,240 if age 71 or older.

These amounts are reviewed annually and if warranted are adjusted for inflation.

Note, too, that some states also provide tax breaks at that level for long-term care insurance costs.

Here's hoping that you and yours enjoy long, healthy and happy lives. But if you do eventually need help, be sure to check out whether some of those costs also can help out at tax time.

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