I assume you can input LTC Ins premiums using Misc expenses, but like @patton525 suggests, that's about all you can do with LTC Ins in PRC. Problems with modeling LTC Ins is that premiums can increase without notice, and using the insurance is a case of maybe you will use it, maybe you won't. How do you model that? I did look into a hybrid Ins product that allows you to use life insurance payouts for long term care expenses or, if you don't need it for LTC expenses, it pays out a lump sum at end of life like normal life insurance. The difference is that instead of monthly premiums you pay a lump sum upfront, like $100,000. Based on the plan I looked at, if you don't use it within the first 20 years, you would make more money investing the 100 grand in the stock market assuming a real return of 5%. I looked at the plan a few years ago when I was 58 years old, and decided that I should be able to avoid going into a nursing home before I turned 78. So it depends on your health history and on how well you plan on taking care of yourself.
@kellyj If your only source of funding was the Roth, you might not be able to use the healthcare deduction. You wouldn't be wasting the deduction if using Roth because you don't need it. Withdraws from Roth IRA's are not considered income and are therefore not taxed, so there is nothing to deduct from, because no taxes are due. I hope I was understanding what you were saying.
@pizzaman What I mean is:
Let's consider just your tIRA, your Roth, and your LTC expenses.
Option 1 is to draw your IRA down before going into LTC, then go into LTC and pay via Roth. All your tIRA withdrawal would be taxed (with no healthcare deductions), none of your Roth would be taxed (of course).
Option 2 is to draw down your Roth first (paying no tax), and then go into LTC, pay via tIRA withdrawals, and get a deduction for the cost of LTC (after the first 7.5% of AGI).
Comparing #1 and #2, #2 is more tax efficient, because you get to use the cost of LTC as a deduction. I think that is what Bill Hines meant by "leave some money in tIRA to pay for LTC".
(Obviously this gets more complicated when there are other expenses, other deductibles, other taxable income, etc. )
Well, maybe. What if you never have any significant LTC expenses? About 1/3 of Americans don't end up in a nursing home or assisted living situation 🙂. Now you are going to have a higher tax burden late in life and possibly have more of your social security taxed when you do finally withdraw from your rIRA without the benefit of the deduction you can't use. Doing Roth conversions when stocks are down will in the long run save you more money then LTC deductions could later on. There are many variables in play as you indicated😏.
Maybe @smatthews51 will chime in, but I think you can include LTC premiums as well as self-funded costs in the lower part of that healthcare expenses page for LTC costs. They're handle the same way tax-wise, I believe, as long at the LTC plan is qualified (meets the criteria set forth by the IRA, i.e. only covers LTC, not some other insurance policy with a LTC rider, for example.
As far as the traditional IRA being a good use for that, here's a good article: https://www.thestreet.com/retirement/a-creative-way-to-pay-the-long-term-care-bill-14526278. That's why I'm saying to be careful about converting that advantage away too zealously.
Yes, it's based on the assumption that by the time you need LTC, you have no income other than retirement distributions, pensions, etc and can itemize these escalating health costs as they'll usually easily surpass the 7.5% threshold. Pralana gives us the means to game this out, right? It's all on the Taxes tab in the tabular projections, and elsewhere in the data we get.
Another article here: https://www.kiplinger.com/article/retirement/t036-c005-s004-deduct-expenses-for-long-term-care-on-your-tax-return.html
Interesting tidbit about hybrid Ins policies in the Kiplinger article provided by @hines202: "The insurance policy itself must also meet certain requirements for the premiums to be deductible. For instance, it can only cover long-term-care services. This limitation means the deduction “only applies to traditional long-term-care policies”—not “hybrid” policies that combine life insurance with long-term-care benefits,..."
The article also talks about deductions: The deduction has an age-related cap. For 2021, the cap is $5,640 if you’re older than 70, $4,520 if you’re 61 to 70, and $1,690 if you’re 51 to 60. (For those 41 to 50, it’s $850, and for 40 or younger, it’s $450.). Does that only apply to LTC Ins premiums and not expenses??
@pizzaman Lets hope the age related limited deduction only applies to premiums. If not, there is very limited benefit here.
More research: The entire costs paid (including meals and lodging) to a nursing home, home for the aged, or similar institution, are fully deductible as a medical expense if the person is staying at the home primarily for medical care. These are not subject to age related deductible limits, only LTC Ins premiums are. Yea!!! https://www.whitlockco.com/long-term-care-expenses-can-deduct/
This link also gives a better description of the hybrid plans: https://www.forbes.com/advisor/life-insurance/2021-ltc-deduction-limits/
The premium for life insurance policy with a long-term care benefit—often called a hybrid policy—can be deductible. But there’s a catch. Only the portion of the premium that goes toward long-term care coverage is deductible, Slome says.
For example, the annual premium on a Nationwide permanent life insurance policy that would pay a $5,000 monthly long-term care benefit would be $8,249 for a 65-year-old man, Slome says. Of that amount, about $2,130 would be eligible to count toward medical expenses as a qualified long-term care insurance premium.
Your life insurance policy illustration should show a breakdown of the premium you’re paying. If you’re considering buying a life insurance policy with a long-term care benefit, ask what portion of the premium would potentially be tax deductible.
I wouldn't put these under Misc expenses though, as the healthcare rates of inflation won't be applied, nor any optimization for tax itemized deduction as a medical expense. If it's in a life insurance policy, i think those are off the table.
I'm really down on these whole life policies. They're being snapped up by offshore private equity firms that don't have to abide by US stringent oversight, regulation, compliance and can play fast and loose with the money, enrich their execs, and then whoopsie, go out of business. Same with annuities. One client's Prudential "The Rock!" policy just got sold off to a Bermuda company.
Anyway, back to LTC, this is why I recommend people set up some kind of small business/side hustle in retirement, a simple LLC or something, and continue to write things off like LTC, health care, solo 401k, as employee benefits. Doesn't have to be complicated, LLC can be just the one or two people in the marriage. Write off your phone, internet, maybe home office expenses, at least while you're young and in the go-go years. It's not hard to do. You're eligible even if you're doing some Uber/Lyft or whatever. I think one of the articles I posted alludes to that.
Maybe put the equivalent of 7.5% of your AGI under Misc expenses, this will compensate for the fact that PRC considers 100% of medical expenses tax deductible.
@pizzaman When the manual states that all LTC expenses are deductible, it means they are deductible expenses. But, as you say, only costs that exceed 7.5% of your AGI can actually be deducted, and that's how they're treated in PRC.
@pizzaman No, PRC does NOT consider 100% of medical expenses to be tax deductible. It follows IRS rules precisely in this regard.
Stuart
@hines202 It wasn't necessarily my intention to include LTC premiums in the LTC expenses section of the Healthcare Expenses page since it doesn't allow for different expense levels for different time periods. Also, I think there are some fairly low limits on how much of your LTC premiums can be deducted (something like $4500 for someone between age 61 and 70) which is a drop in the bucket compared to actual LTC costs.
Stuart
@smatthews51 Where do you recommend LTC premiums be recorded? These costs rise very quickly beyond the regular inflation rate, but this section is limited to the regular inflation rate. Maybe we should record the premiums in different years and force the uptick in cost (best estimate) in subsequent years to be safe.
@patton525 A suggestion would be to use the Miscellaneous expenses page to make separate line items for LTC premiums, with a separate line for every 5-year period.
Stuart
