Long-term care (LTC) planning is not just about ensuring access to quality healthcare—it also involves understanding the tax implications that come with funding your care. How you fund your long-term care—through insurance, savings, or public benefits—can have major tax implications. By being proactive, North Carolina residents can take advantage of available deductions, credits, and tax-efficient strategies to ease the financial burden of long-term care.
Tax Treatment of Long-Term Care Insurance Premiums
Long-term care insurance can be an essential tool in managing future healthcare costs, and the IRS provides tax incentives to encourage its use. If you have a tax-qualified LTC insurance policy, you may be able to deduct a portion of your premiums as a medical expense. However, this deduction is subject to age-based limits, which are adjusted annually.
For 2025, the maximum deductible amounts are:
- Age 40 or under: $480
- Age 41 to 50: $900
- Age 51 to 60: $1,800
- Age 61 to 70: $4,810
- Age 71 or over: $6,020
Is long-term care insurance tax-deductible in NC?
It’s important to note that these premiums count toward the medical expense deduction, meaning only the portion of your total medical expenses exceeding 7.5% of your adjusted gross income (AGI) is deductible. Additionally, North Carolina may offer state tax incentives for LTC insurance premiums. Tax professionals can help you assess eligibility and potential deductions.
Are Long-Term Care Insurance Benefits Taxable?
For most people, the good news is that benefits received from a tax-qualified LTC insurance policy are generally not taxable. When your policy pays for qualified long-term care services, such as home health care, assisted living, or nursing home care, those benefits are typically excluded from your taxable income. However, there are exceptions, such as policies that pay out benefits on a per diem basis exceeding the IRS daily limit. It’s important to review your policy terms to ensure you understand how benefits will be taxed in your specific situation.
Using Health Savings Accounts (HSAs) for Long-Term Care
Health Savings Accounts (HSAs) provide a triple tax advantage when saving for medical expenses, including long-term care. Contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses, including LTC costs and insurance premiums (subject to age-based limits), are also tax-free. This makes HSAs one of the most tax-efficient ways to prepare for long-term care needs. However, only individuals with high-deductible health plans (HDHPs) are eligible to contribute to an HSA, so planning ahead is key.
2025 HSA Limits for Long-Term Care
For 2025, the maximum HSA contribution limits are $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution allowed for those age 55 and older.
How does Medicaid affect taxes in retirement?
Many North Carolina residents rely on Medicaid to cover long-term care costs, but qualifying for Medicaid often requires careful planning. Gifting or transferring assets to qualify for Medicaid can have unintended tax consequences, such as triggering capital gains taxes for the recipient. For example, if you transfer a highly appreciated asset like a house or stock to a family member, they may owe significant taxes when they sell it. Proper Medicaid planning, including the use of irrevocable trusts or strategic asset transfers, can help mitigate these tax liabilities. An elder law attorney can help you navigate these rules and ensure you meet Medicaid requirements without creating unnecessary tax burdens.
Tax Considerations for Employer-Paid Long-Term Care Insurance
For business owners and self-employed individuals, paying for LTC insurance through a business entity can provide additional tax benefits:
- C Corporations: If a C corporation pays LTC insurance premiums on behalf of employees, those premiums are typically 100% deductible as a business expense, without being included in the employees’ taxable income.
- Self-Employed Individuals: Those who are self-employed or own pass-through entities like S corporations or LLCs can deduct their LTC insurance premiums, but deductions are subject to the same age-based limits as individuals.
- Partnerships: Partners and members of LLCs taxed as partnerships can generally deduct their LTC insurance premiums, though different rules may apply based on how the policy is structured.
For business owners, structuring LTC insurance payments correctly can lead to significant tax savings. Work with a qualified advisor to make sure you maximize deductions while staying compliant with IRS regulations.
Planning for a Tax-Efficient Approach to Long-Term Care
North Carolina follows federal tax rules for capital gains, stepped-up basis, and income exclusions on LTC benefits. Navigating the tax implications of LTC requires careful planning and a thorough understanding of federal and state tax laws. Whether you’re considering LTC insurance, utilizing an HSA, or preparing for Medicaid eligibility, there are tax-efficient strategies to help minimize financial strain.
Working with a financial advisor and an elder law attorney experienced in North Carolina’s regulations can provide personalized guidance based on your specific situation. They can help you optimize deductions, structure asset transfers wisely, and ensure your long-term care planning aligns with your overall financial goals.
Take Control of Your North Carolina Long-Term Care Tax Strategy
Long-term care planning isn’t just about covering costs—it’s also about reducing unnecessary tax burdens and protecting your assets. By leveraging available tax benefits and planning ahead, you can make long-term care more affordable while securing peace of mind for the future.
At Carolina Family Estate Planning, we specialize in long-term care and tax-efficient estate planning. Our team can help you explore tax deductions, structure Medicaid planning, and develop strategies to safeguard your wealth while preparing for your future care needs.
Schedule a free case assessment today to take the first step toward a financially secure future with a comprehensive, tax-smart long-term care plan.
FAQs: Taxes & Long-Term Care in North Carolina
1. Is long-term care insurance tax-deductible in North Carolina?
Yes, premiums for qualified long-term care insurance policies may be deductible on both federal and North Carolina state tax returns. The deductible amount depends on your age and is subject to medical expense thresholds—only expenses exceeding 7.5% of your adjusted gross income (AGI) are deductible. Check with a tax professional to determine your eligibility.
2. Will my long-term care insurance benefits be taxed?
In most cases, no. Benefits from a qualified LTC insurance policy are generally not included in taxable income. However, if your policy pays a daily per diem amount that exceeds the IRS limit, the excess may be taxable.
3. Can I use my HSA to pay for long-term care?
Yes. Health Savings Account (HSA) funds can be used tax-free for qualified long-term care expenses, including some LTC insurance premiums, subject to age-based IRS limits. For 2025, HSA contribution limits are $4,300 for individuals and $8,550 for families, with an extra $1,000 catch-up contribution for those over 55.
4. How does Medicaid affect my taxes in retirement?
Qualifying for Medicaid may require gifting or transferring assets, which can trigger capital gains taxes for the recipient. For example, transferring a highly appreciated asset like real estate may result in significant taxes when the asset is sold. Strategic planning—such as using irrevocable trusts—can help avoid unintended tax consequences.
5. Can business owners in NC deduct LTC insurance premiums?
Yes. C corporations can typically deduct 100% of premiums paid for employees without those premiums being taxed as income. Self-employed individuals and pass-through entities like S corps or LLCs can also deduct premiums, but the deduction is subject to the same age-based limits as individuals.
6. Are there North Carolina-specific tax breaks for LTC planning?
While North Carolina follows most federal tax rules, some state-level tax incentives may be available for LTC insurance premiums. A financial advisor familiar with NC tax law can help you explore all available options.
This article is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified attorney or tax professional regarding your individual situation.
