by Melissa Klein
Members of the financial planning community are lauding proposed legislation that would provide tax breaks and credits for long-term care insurance, but it may get buried beneath the avalanche of paper related to the tax cut plan based on President George W. Bush’s proposal.
Legislation introduced by Rep. Nancy Johnson, R-Conn., and Rep. Earl Pomeroy, D-N.D., last month could make long-term care insurance more affordable for families and caregivers who pay directly for long-term care expenses.
The Long-Term Care and Retirement Security Act of 2003 (H.R. 2096) would create a tax deduction for people who purchase long-term care insurance policies, permit long-term care policies to be offered under employer-sponsored cafeteria plans and flexible spending accounts, and provide a $3,000 tax credit for caregivers and taxpayers with LTC expenses.
The bill would provide an initial 25 percent above-the-line deduction for a long-term care insurance premium, phased in to a 100 percent deduction by 2008, and a phased-in annual tax credit of $3,000 for taxpayers who pay long-term care expenses and family members who provide care.
“Our goal is to make long-term care premiums more affordable to middle-income families that would benefit from the protection of long-term care insurance policies,” Pomeroy said during a phone interview from his Washington office. “Medicaid pays long-term care expenses for people with no assets, and people with lots of assets can afford to pay for long-term care. But for a middle-class couple, long-term care costs, which can easily reach $60,000 annually, can be financially devastating. Those costs have probably been the leading reason for impoverishing seniors by wiping out their savings.”
“I’m disappointed that this legislation didn’t get put into the tax bill roaring through Congress,” Pomeroy added. “The deeper the deficit hole, the harder it will be to pass targeted tax relief measures that are important to middle-income families.”
The aging population has made long-term care costs a perennially hot issue. Demographics paint an ominous picture, with the number of Americans age 65 and older poised to explode. That segment of the population is expected to double over the next three decades to 70 million, according to the U.S. Census Bureau. In 2030, 20 percent of the population, or one in every five people, will be 65 or older.
People age 85 and older are the fastest growing segment of the older population. Three years ago, they made up 2 percent of the population. By 2050, they’ll account for 5 percent of the population, or 19 million people.
More than half of the U.S. population will require some type of long-term care during their lives, according to Americans for Long-Term Care Security, a coalition of consumer, health care and senior organizations, and associations representing insurance companies and producers. What’s more, the national average cost of a year in a nursing home is estimated at $46,000, and can easily cost twice that amount in some metropolitan areas.
The Atlanta-based Financial Planning Association, a membership group for financial planners, has lent its support to the legislation. Through membership in the ALTCS, the FPA has been involved in lobbying efforts to enact tax credits for long-term care insurance.
“We like the legislation. We like the aspect of helping people save for long-term care insurance needs by giving a tax break on premiums, and also helping those with needs right now through tax credits for family caregivers,” said Suzanne Morgan, assistant director of government relations for the FPA. Morgan noted that similar legislation was introduced in the past two Congresses, but long-term care issues have been overshadowed by prescription drug and Medicaid issues.
“We think it would have great impact,” she added. “It can cost $50,000 to $100,000 a year to provide long-term care. If people don’t have those kinds of assets, they won’t be able to pay. To have a vehicle in place to start the process of building that coverage up so people will have it when they need it would be beneficial to our members’ clients.”
“I think it’s an excellent bill,” said Arthur Stein, a certified financial planner and LTC insurance specialist with Cassaday & Co. Inc., in McLean, Va. “It would offer a straight deduction of long-term care insurance premiums from income. That would be a real incentive for people to buy these policies.”
He added, “Under current law, LTC premiums are potentially deductible for every one on their federal income taxes, but almost no one can take the deduction because a certain amount of the premiums paid can be added to unreimbursed medical expenses.”
Since unreimbursed medical expenses are only deductible to the extent that they exceed 7.5 percent of adjusted gross income, Stein said that only about 5 percent of tax returns take that deduction.
“It would save the government money in the long term, because it would keep enough people off of Medicaid to pay the lost tax revenue,” he added.
“I like it far better than the bills I’ve seen that would phase out the deductibility of premiums for higher income taxpayers,” Stein said. “I think a phase-out is a mistake. Long-term care insurance isn’t a good product for poor people. It’s appropriate for middle-class and upper-middle-class people. A deductibility phase-out doesn’t make sense.”
Stein also noted that allowing people to pay for premiums with pre-tax dollars through flexible spending accounts would be a “huge incentive,” adding, “It would be a real step forward for the long-term care insurance industry.”
“I think it’s a sensible approach,” said Alfred C. Clapp Jr., president of Financial Strategies and Services Corp., in Bronxville, N.Y., which specializes in planning for seniors. “The phase-in is in keeping with today’s world and style. It precludes the need for cafeteria plan approval. I think they’re going in the right direction.”
“There needs to be strong incentive [to buy LTC insurance]. We don’t have a safety net and people have to look at the issue,” he added.
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