In a superb piece on kiplinger.com, Kimberly Lankford outlines “several tax-advantaged ways to help take the sting out of the costs of long-term-care coverage.” Her article:
“1. Tax-free withdrawals from an HSA. If you have a health savings account, you can withdraw money tax-free to pay a portion of eligible long-term-care insurance premiums. The amount you can withdraw is based on your age. In 2016, the limit for each person is $390 per year if you are 40 or younger; it is $730 for people ages 41 to 50; $1,460 for ages 51 to 60; $3,900 for ages 61 to 70; and $4,870 for ages 71 and older. You can withdraw up to those limits tax-free for your spouse’s coverage, too. See IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information.
“2. Deduct long-term-care premiums as a medical expense. A portion of your long-term-care premiums can qualify as a tax-deductible medical expense; the same age-based limits apply to these deductions as to health savings account withdrawals. You can’t double dip and deduct the expenses if you took a tax-free HSA withdrawal to pay the same costs. Medical expenses are deductible to the extent they exceed 10% of your adjusted gross income, or more than 7.5% of your AGI if you’re 65 or older. Most traditional long-term-care policies issued in the past several years are eligible. See IRS Publication 502, Medical and Dental Expenses, for more information about the requirements.
“3. Make a tax-free transfer from an annuity. You can transfer money tax-free from an annuity to cover premiums for a traditional long-term-care policy or to pay for another annuity that also provides long-term-care benefits. The transfer (called a 1035 exchange) must be made directly from the annuity to pay the premiums. If you withdraw the money from the annuity rather than making the tax-free transfer, you have to pay income taxes on the gains, which are taxed first, before you recover your principal. For more information, see Use Annuities to Pay for Long-Term Care. Your long-term-care insurer should be able to help you make the transfer.
“4. Make a tax-free transfer from permanent life insurance. You can also make a tax-free 1035 exchange from a cash-value life insurance policy to pay long-term-care premiums, either for a traditional long-term-care policy or a policy that combines life insurance and long-term-care benefits. The money can come from the policy’s cash value, or you can use the policy’s dividends to pay the long-term-care premiums. This strategy can be useful as you get older and your primary needs change from life insurance to long-term care.”