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Don't forget your long-term care insurance when filing your taxes

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As the end of the year approaches, it seems like good time to discuss the tax advantages of long-term care insurance. Both federal and state governments have implemented tax incentives for those who purchase LTC insurance to lessen the strain on Medicaid as baby boomers enter their senior years. Better still, the deductible limits are increasing.

The tax advantages of a LTC insurance policy depend on a person's employment situation, location and other factors. Tax advisors can assist people in claiming the deductions that are applicable to them and help them strategize for improving those advantages for 2015.

For self-employed people, LTC insurance premiums are listed under "self-employed health insurance deduction" on Internal Revenue Service Form 1040. Therefore, this deduction can substantially reduce your taxable income.

People who own or belong to a C corporation (also just known as a regular corporation) can deduct all of their LTC premiums. There are ways that a C corporation can further maximize the advantages of LTC policies. Your tax advisor can assist you with that.

People who work for an employer can include LTC premiums as medical expenses. The amount of medical expenses that exceeds 7.5 percent of an individual's adjusted gross income are deductible, so it's less of a tax advantage than for the people listed above. However, when you factor in LTC insurance, you may exceed that amount even if you wouldn't have based on your expenses for medical care.

Further, if your employer offers a health savings account, you can use the funds in that account to pay your LTC premiums. Because the money in HSAs is not taxed, you're paying your premiums on a pre-tax basis.

Depending on what state you live in, you may be able to take a state income tax deduction or receive a tax credit. Over half of all states offer tax advantages to encourage people to get LTC insurance. In some cases, that's up to a quarter of the total premium paid during the year.

If these tax advantages help convince you to purchase a LTC insurance policy, be sure to review the terms carefully. You may find it worthwhile to consult with your legal and financial advisors before you choose a company and a policy. LTC insurance is wise investment in your family's future, but you want to be sure that when you're ready to file a claim, you'll be covered.

Source: Bankrate, "Tax advantages of long-term care insurance" Jay MacDonald, Dec. 08, 2014

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