Long-Term Care Premiums Paid by New York Resident Taxpayers: A Potential Double Benefit

By:
David M. Barral, CPA/PFS, CFP
Published Date:
Oct 1, 2017

For those who are proactive in planning for their end-of-life care, purchasing long-term care (LTC) insurance is a great idea. There are also tax benefits available for the premiums paid. Most CPAs are familiar with considering these premiums as an itemized deduction at the federal level under IRC section 213(d)(1)(D), but these premiums are not 100% deductible—it is adjusted annually and limited by the age of the taxpayer.

Age at the close of the tax year:
2016
2017
40 or less
$390
$410
Over 40 but not over 50
$730
$770
Over 50 but not over 60
$1,460
$1,530
Over 60 but not over 70
$3,900
$4,090
Over 70
$4,870
$5,110

 

Fortunately, most tax software helps facilitate this deduction so these limits do not have to be committed to memory every single year. If a tax practitioner entered $7,000 for LTC premiums, most software will handle the limits under IRC section 213(d). Most software will also handle the credit allowed on the New York tax return (discussed later).

Keep in mind, however, how this deduction differs for the self-employed. Self-employed taxpayers are permitted to deduct the health insurance premiums paid to arrive at their Adjusted Gross Income (AGI). LTC premiums can be deducted as an adjustment to AGI; however, the limits applied when LTC premiums are taken as an itemized deduction are also applied when they are taken as an above-the-line deduction under IRC section 162(l)(2)(C)).  

For most taxpayers, facing the 10% hurdle for medical deductions as an itemized deduction is hard enough. Furthermore, applying the limitations for LTC premiums discussed above only hinders any tax benefit for the LTC premiums paid. This is when it appears to be a distinct advantage for the self-employed when they take this as an adjustment to arrive at their AGI.

State Considerations: The Double Benefit

The New York State income tax calculation will consider amounts the taxpayer reported as adjustments to their AGI. Section 612 of the New York Tax Law addresses New York AGI, which consists of “federal adjusted gross income as defined in the laws of the United States for the taxable year, with modifications specified in this section.”  New York AGI first begins with federal AGI and then makes additions and subtractions; however, there is no coordination in section 612 for the LTC premiums paid that will be considered again as a credit on the New York tax return. All of these federal adjustments to AGI are reported on the N.Y. Form IT-201, line 18.

When LTC premiums are taken as a federal itemized deduction and not as an adjustment to AGI, however, it is also considered as a subtraction adjustment for itemized deduction purposes under New York tax law (please see N.Y. Form IT-201-D, line 9). The subtraction is not 100% of the amount included on Schedule A line 1, but rather the percentage of line 1 that was actually deductible on Schedule A line 4 (see New York Tax Law section 615(c)(4)). The intent of this is probably to prohibit a double benefit—first as a New York itemized deduction, and again when provided as a New York tax credit on the total premiums paid.

Under New York Tax Law section 606(aa), resident taxpayers shall be allowed a credit against tax equal to 20% of the premiums paid during the taxable year. Taxpayers can also carry over to future tax years any amount of the credit that is in excess of their tax liability for that tax year.

New York Tax Law section 606(aa) does not specifically make any mention of adjusting the credit claim for long-term care insurance if an adjustment to AGI was also taken. The itemized deduction adjustment discussed above is addressed in section 615(c)(4) and affects regular taxpayers, not self-employed business owners. New York does not discuss adjustments or coordination if this is was also taken as an adjustment to federal AGI and later considered on the New York return as a credit.

This provides a distinct and probably unintended double benefit by New York for the self-employed who are paying LTC premiums. Self-employed New York resident taxpayers can take an adjustment to AGI subject to limits and a credit on their New York return equal to 20% for the total premiums paid!

There is also another similar benefit for those eligible for their LTC benefits. Some LTC contracts contain a waiver-of-premium feature, which allows the insured to stop paying premiums while receiving benefits. Every policy is different—for example, some plans waive premiums for nursing home care but not for home care.

Individuals receiving long-term care can take a New York State subtraction on the IT-201 (line 23) for fees (not premiums) paid during the year that were attributable to the cost of providing long-term care under a continuing care contract. The subtraction under New York Tax Law section 612(c)(34) is also subject to the limits under IRC section 213(d). If this individual is not receiving a waiver of their premiums, they may also take the credit on the total premiums paid discussed earlier. Again, this is providing another double benefit: a New York subtraction and a credit.

Early planning for long-term care is critical. Giving away most of one’s assets via a Medicaid Asset Protection Trust (MAPT) is often a last resort when no long-term care planning was done through insurance, and the loss of control can be defeating at a time of vulnerability.

While it is unclear if New York has created an unintentional double benefit, the tax loss on its end may clearly make up for the amount saved on the portion with which it funds Medicaid. In any event, it is important for CPAs to acknowledge and make adjustments for these additional benefits for their New York resident tax clients.  


barralDavid M. Barral, CPA/PFS, CFP, is a manager at MBAF CPAs, LLC, in New York, N.Y. He is a member of the NYSSCPA Personal Financial Planning Committee, as well as its vice chair. He is also an adjunct professor at Wagner College in Staten Island, N.Y. He can be reached at dbarral@mbafcpa.com.

 
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