Do Long-Term Care Benefits Reduce Medical Expense Deduction?
Explore the tax calculation where long-term care benefits received must be subtracted from total medical costs before determining your final deduction.
Navigating the tax implications of long-term care can be complex, particularly when it comes to understanding how insurance benefits interact with the medical expense deduction. Many taxpayers are unsure if they can deduct their care costs while also receiving tax-free benefits from an insurance policy. The rules established by the Internal Revenue Service (IRS) create a specific relationship between these two provisions. This interaction requires careful calculation to determine any potential tax deduction.
The Medical Expense Deduction for Long-Term Care
Taxpayers who itemize deductions can deduct the amount of their qualified medical expenses that exceeds 7.5% of their adjusted gross income (AGI). This AGI threshold means that if your AGI is $60,000, you can only deduct medical expenses that are more than $4,500. The IRS defines medical care expenses as payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, and they include the costs of treatments affecting any part or function of the body. These can range from payments to doctors and dentists to the costs of prescription drugs and insulin.
Qualified long-term care services are also considered deductible medical expenses. They include maintenance and personal care services required by an individual who is considered “chronically ill.”
To be classified as chronically ill for tax purposes, a licensed health care practitioner must certify an individual as being unable to perform at least two activities of daily living (such as eating, bathing, dressing, and toileting) for a period of at least 90 days. Alternatively, an individual can be certified as requiring substantial supervision to protect them from threats to health and safety due to severe cognitive impairment. The plan of care must be prescribed by a licensed health care practitioner.
Tax Treatment of Long-Term Care Insurance Benefits
When a long-term care insurance policy pays out, the tax treatment of those benefits depends on the type of policy. For a “tax-qualified” long-term care insurance contract, benefits are generally excludable from your gross income, meaning you do not pay tax on the money you receive.
Policies typically pay benefits in one of two ways. A reimbursement or indemnity policy pays for the actual long-term care expenses incurred, up to a specified limit. A per diem or cash policy pays a predetermined, fixed daily amount, regardless of the actual expenses for that day.
For per diem plans, there is a federally set limit on how much can be received tax-free. For 2025, this amount is $420 per day. If the daily benefits received from the policy exceed this limit, the excess amount may be considered taxable income. This occurs if the total benefits received are greater than the actual long-term care costs incurred during the year.
How Benefits Received Affect Your Deduction
The core rule governing the interaction between long-term care benefits and the medical expense deduction is that you must reduce your total medical expenses by any tax-free reimbursements before calculating your deduction. You cannot deduct expenses that have already been paid for with tax-free funds. This prevents a “double benefit” of receiving tax-free insurance payments while also deducting the same expenses from your income.
First, you must sum all of your qualified medical expenses for the year, including any long-term care service costs. Second, you subtract the total amount of tax-free benefits you received from your long-term care insurance policy during that same year. The resulting figure is the amount of out-of-pocket medical expenses that are eligible for the deduction.
Finally, you apply the AGI threshold to this net amount. For example, assume your AGI is $80,000, making your deduction threshold $6,000. If you incurred $25,000 in qualified long-term care costs and your reimbursement-style policy paid out $20,000 in tax-free benefits, your net medical expense is $5,000. Since this is below your $6,000 AGI threshold, you would not have a medical expense deduction.
Consider a scenario with a per diem policy that pays $200 per day for 100 days, for a total of $20,000 in benefits, while your actual costs were $25,000. Since the daily benefit is below the 2025 limit of $420, the entire $20,000 is tax-free. You would subtract this $20,000 from your $25,000 in costs, leaving $5,000 in expenses to which the AGI threshold would be applied. If your benefits exceeded your actual costs, you could not deduct any of the expenses.
Including Long-Term Care Premiums in Medical Expenses
The premiums paid for a qualified long-term care insurance policy can also be included in your total medical expenses. However, the amount of the premium that you can include is subject to annual, age-based limits. These limits are adjusted for inflation by the IRS.
For the 2025 tax year, the maximum premium amount that can be included as a medical expense is determined by your age at the end of the year.
- Age 40 or under: $480
- Ages 41 to 50: $900
- Ages 51 to 60: $1,800
- Ages 61 to 70: $4,810
- Over age 70: $6,020
These deductible premium amounts are added to your other qualified medical expenses for the year. This total is then used in the deduction calculation.