Dear Clients and Friends:

Can you deduct premiums you are paying for nursing home insurance?

This is a somewhat complicated issue. Amounts paid to a nursing home itself, as opposed to an insurance company for nursing home insurance, are fully deductible if the principal reason for staying in the nursing home is medical, as opposed to custodial, etc. care. However, if you are not in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. In that case, you would get no deduction, for example, for the portion of your fee that is allocable to food or lodging.

Amounts paid for medical insurance are generally considered deductible medical costs. However, where an insurance contract provides benefits for both deductible medical care and for other items, only the portion of the premium that covers deductible medical expenses (as defined above) has been treated as deductible, and, that portion is deductible only if it is separately stated in the contract or in a separate billing statement and only if it is not 'unreasonably large in relation to the total charges under the contract.'

The definition of deductible expenses for medical care includes the costs of qualified long-term care services and eligible long-term care insurance premiums. Thus, these costs can be claimed as itemized deductions, subject to the 7.5% of adjusted gross income floor applicable to the medical expense deduction.

To qualify for the deduction, the long-term services must be required by a chronically ill individual and encompass necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services, so long as these services are part of a plan of care prescribed by a licensed health care practitioner.

A long-term care insurance contract is one that provides only coverage for qualified long-term care services, does not duplicate Medicare, is guaranteed renewable and does not have a cash surrender value. Payments under the insurance contract may be made on a per diem or periodic basis without regard to actual expenses with a cap for 2000 of the greater of $190 per day or actual expenses. Thus, the annual excludable benefits for 2000 can't exceed $69,350. The deduction of premiums for the long-term care insurance contract is subject to an annual premium deduction limitation for each individual that is based on age. For an individual over 70, up to $2,750 can be deducted for 2000.

Although these new rules apply to contracts issued after 1996, a special rule may allow an existing contract to receive this beneficial treatment. If you have any questions regarding whether your nursing home insurance qualifies as a long-term care insurance contract, please call (315)363-3338. I will be happy to review your contract to determine the deductibility of the premiums.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner