Many people don’t give much thought to long-term care insurance—but they should. The financial burden of chronic illness or disability can be overwhelming, and relying on government programs like Medicare and Medicaid may not provide sufficient support.
- Medicare: Covers only short-term skilled nursing care (up to 100 days), with strict eligibility requirements.
- Medicaid: Provides more extensive coverage, but only if you meet strict income and asset limits.
Since government programs are limited, private long-term care insurance is often the best solution. Fortunately, business owners can use tax strategies to get the government to subsidize their long-term care insurance through tax deductions.
This guide explores how business owners can maximize their tax deductions for long-term care insurance, depending on their business structure.
Three Tax Deduction Possibilities
As a business owner, your long-term care insurance deduction depends on how your business is structured. There are three possible outcomes:
- 100% Deduction – Full business deduction without limits.
- Tax Code Limited Amount – Deduction subject to annual IRS limits.
Itemized Deduction – Deduction only if medical expenses exceed 7.5% of adjusted gross income (AGI).
1. 100% Deduction: The Best Case Scenario
C Corporation Owners
- Your corporation can pay for your long-term care insurance as a tax-free employee benefit.
- The corporation can fully deduct the premiums as a business expense.
- Unlike health insurance, long-term care insurance does not have to be offered to all employees—you can provide coverage just for yourself.
Sole Proprietors & Single-Member LLCs (With a Spousal Employee)
- If your spouse is your only employee, you can use a Section 105 Health Reimbursement Arrangement (HRA).
- The HRA reimburses medical expenses tax-free, including long-term care insurance.
- Since it is a business reimbursement, the deduction is not subject to the IRS limits.
Best Strategy: If you are a sole proprietor, hire your spouse, set up an HRA, and deduct 100% of the premiums.
2. Tax Code Limited Deduction: Partial Deduction Based on Age
If you don’t qualify for a 100% deduction, your long-term care insurance premiums are subject to annual IRS limits. In 2024, the deduction limits are:
Age | Maximum Deductible Amount |
40 & below | $470 |
41-50 | $880 |
51-60 | $1,760 |
61-70 | $4,710 |
71 & over | $5,880 |
These limits apply to:
Sole Proprietors & Single-Member LLCs (Without an HRA)
- Your deduction is reported on Form 7206 (Self-Employed Health Insurance Deduction).
- Your deduction cannot exceed the IRS age-based limits.
S Corporation Owners
- If you own more than 2% of an S corporation, you must follow these steps:
- The S corporation must pay the premiums or reimburse you.
- The premiums must be reported as taxable wages (on your W-2, but not subject to employment taxes).
- You deduct the cost on Form 7206, subject to the IRS age-based limits.
Partnerships & Multi-Member LLCs
- The partnership must pay or reimburse the partner’s premiums.
- The premiums are reported as guaranteed payments.
- Each partner deducts the premiums on Form 7206, subject to IRS limits.
Planning Tip: If you run an S corporation or partnership, consider switching to a C corporation or using a spousal HRA to maximize deductions.
3. The Itemized Deduction “Crapshoot”
If you don’t qualify for a business deduction, you can still deduct long-term care insurance as a personal medical expense—but only if:
- Your total medical expenses exceed 7.5% of your AGI.
- You itemize your deductions (instead of taking the standard deduction).
Example: Limited Deduction Due to AGI Floor
Let’s say you are 52 years old, have an AGI of $100,000, and pay $4,000 for long-term care insurance. You also have $8,571 in other medical expenses.
Total Medical Expenses | $12,571 |
Minus IRS Cap on Insurance | ($2,240) |
Minus 7.5% AGI Floor | ($7,500) |
Total Deduction | $2,851 |
Problem: You paid $12,571 in medical expenses, but you can only deduct $2,851—and only if you itemize.
Best Alternative: Use a C corporation or a Section 105 HRA to deduct the full $12,571 as a business expense.
Qualified Long-Term Care Insurance Requirements
To be deductible, long-term care insurance must meet IRS qualifications:
- Must cover only long-term care services.
- Must be guaranteed renewable.
- Cannot have a cash surrender value.
- Cannot duplicate Medicare coverage.
If your policy does not meet these conditions, it is not deductible.
Key Takeaways
1. Best Deduction: 100% Tax-Free Coverage
- C corporations can fully deduct long-term care insurance as an employee benefit.
- Sole proprietors with a spousal employee can use an HRA to deduct 100% of the cost.
2. Partial Deduction: Self-Employed & S Corporations
- Sole proprietors, S corporations, and partnerships must follow IRS age-based limits.
- S corporation owners must report premiums on their W-2 before deducting them.
3. Worst Case: Itemized Deduction “Crapshoot”
- If you don’t qualify for a business deduction, your personal deduction is limited by the 7.5% AGI rule.
4. Plan Ahead for Maximum Tax Savings
- Consider restructuring your business (C corp, HRA, or spousal employment) to maximize deductions.
- If your business has fewer than 50 employees, explore ICHRAs or QSEHRAs for health benefits.
- Always ensure your long-term care policy meets IRS “qualified” standards.
By using the right tax strategy, you can protect your future while saving on taxes today.
