Psssst! Hey, small business owner. Want to know a tax-saving secret?
You can take a federal tax deduction for the cost of long-term care insurance premiums. Furthermore, the deduction amount has risen to as much as $4,240 for the 2011 tax year.
"The special rules that can make long-term care insurance fully tax deductible for owners of small and midsize businesses are still a well-kept secret," says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. “In fact, the long-term care insurance tax deduction may be the best-kept secret for small business owners."
Slome adds: “But business owners don’t hear about the tax deduction. Even tax and accounting professionals don’t bring it up, mainly because they get confused.”
Slome describes the long-term care insurance tax deduction as one of the last substantial tax breaks for small business owners. About 8 million small businesses operate in the United States. Currently, 10 million to 12 million Americans require long-term care services; on average, a year's stay at an assisted living center costs $37,200.
“The government created the tax break intentionally they wanted more people investing in long-term care than having to depend on Medicare,” Slome says.
Am I eligible for this tax break?
Of course, your eligibility for the tax break depends on what kind of small business you own. A business owner who has established a "C" corporation can deduct 100 percent of his long-term care insurance premiums as well as those for some family members. A small business owner also can set up a fully tax-deductible "carve out plan," which provides employer-paid long-term care insurance for select employees.
“Even better, if you have a 'carve out' plan, you can use a limited-pay policy where you only pay premiums for 10 years or until the plan participants turn 65,” Slome says. “If you are a 55-year-old business owner, the cost of you and your spouse is 100 percent tax-deductible." In other words, the policy is paid off at the 10-year mark, Slome says, and "you never have to pay a nickel."
A sole proprietor can get the same tax break, Slome says. "It’s not quite as advantageous as for a C corporation owner," he says, "but it’s a better deal than individual taxpayers can get.”
C corporation refers to a certain type of business structure, particularly as it relates to federal taxes. Many corporations are formed as C corporations. A sole proprietor owns an unincorporated business that he operates by himself.
In most cases, individuals who don't own businesses cannot deduct the cost of long-term care insurance premiums, Slome says. To qualify for the deduction, you must clear the IRS' 7.5 percent gross income threshold, which includes health insurance and medical expenses. "Most individuals can’t do that," Slome says.
Uncle Sam's guidelines for the long-term care tax deduction include a limit that depends on the taxpayer’s age at the end of the tax year, says Karla Dennis, CEO at Cohesive Tax, a tax preparation and tax consulting firm in Cypress, Calif.
For instance, the deductible for someone who's age 41 to 50 at the end of the 2010 tax year totals $620. For the 2011 tax year, it's $640. For a small business owner who's at least 71 years old, the deduction adds up to $4,110 in the 2010 tax year and $4,240 in 2011.
Here are the deductible limits for the 2011 tax year:
• Age 40 or less (before Dec. 31, 2011) $340
• Age 41 to 50 $640
• Age 51 to 60 $1,270
• Age 61 to 70 $3,390
• Age 71 and above $4,240
Here are the deductible limits for the 2010 tax year:
• Age 40 or less (before Dec. 31, 2010) $ 330
• Age 41 to 50 $ 620
• Age 51 to 60 $1,230
• Age 61 to 70 $3,290
• Age 71 and above $4,110
If a small business owner wants to create some financial security for the future, the long-term care insurance tax deduction makes sense, experts say.
“It’s a good deal for business owners, although most don’t want to buy long-term care policies for their employees," says James Smith, managing director at Smith Jackson Boyer & Bovard, a Dallas accounting firm. “But we are seeing interest from single-employee firms. There’s plenty of interest there.”