How to Use Untaxed Dollars to Cover Long Term Care

You may have heard that Long Term Care insurance (LTCi) premiums can be tax deductible.  But (and there is always a but), there are restrictions.

LTCi premiums are fully deductible on your Wisconsin income taxes, regardless of whether you itemize taxes, how much or how little your taxes are, or whether you have enough other medical deductions.

Federal income tax rules are a bit more complicated.  First, you must itemize your income taxes. Second, there is an age-based cap on the amount of premium dollars that can be used toward the deduction.  Third, that amount, along with any other medical deductions you have, must exceed 7.5% of your adjusted gross income before you can start deducting it.  This takes all the fun out of it for many people.

But now there is another way to use untaxed dollars to pay for LTCi. Even though Congress authorized this three years ago, most annuity companies have not yet changed their accounting to allow this.

Let’s say that you put some money into a deferred annuity some years back.  Let’s say you deposited $50,000 and over the years it has grown to $100,000.  Any money you withdraw from this annuity will be considered to be interest, and thus entirely taxable.

Instead, you can initiate a direct transfer from this annuity to pay the premium on your LTCi.  The IRS will consider the amount withdrawn to be proportional between principal and deferred interest.  In the example above, the existing annuity is 50% principal and 50% untaxed interest, so that half of the premium would be paid with dollars that are not taxable.

Right now, this strategy works when the annuity and the LTCi are with the same company.  However, the company I use most for LTCi (because it offers the best benefits for the price) has a fixed interest annuity paying 3%– a decent fixed interest rate today.  If your LTCi policy is with this company, you would be able to make a direct transfer from whatever annuity you may currently own into this one, and then have your LTCi premium paid automatically with a combination of principal and untaxed interest.

All this can happen automatically.  You would receive a letter each year stating your premium has been paid; meanwhile, you smile at the use of untaxed dollars to accomplish this.  If you deposit enough into the annuity to generate interest equal to or greater than the LTCi premium, you will always retain the amount of the initial deposit in the annuity.

When your health changes and care is needed, how easy will it be to suddenly turn on an additional cash flow of $50,000 to over $100,000 a year?  If the idea of using untaxed dollars earned in interest, to pay a bill and give you freedom to choose who will care for you and how is important to you, call www.TheLongTermCareGuy.com at (920) 884-3030 to investigate.