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Self-funding LTC and taxes
Old 11-12-2010, 04:45 PM   #1
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Self-funding LTC and taxes

The recent discussions concerning LTC and LTCI have caused me to do some recalculating regarding our ability to self-fund LTC if the need arises. It seems fairly easy to research costs and use the worse-case scenario. I plugged in $90k/yr here in the Chicago area. And for number of years, I just did trials at a number of lengths of stay.
The item I'm struggling to understand is income taxes.

In our case, funds for self-insuring would come from deferred accounts and therefore would add to our income when withdrawn. That level of withdrawal would surely put us in a higher tax bracket. And, we'd have to gross up the withdrawal amount so the post tax residual would cover the NH bill. To the extent that the LTC expenses are deductible as medical expenses under misc deductions, the tax would be reduced.

I'd appreciate some comments and discussion as to what extent a $90k annual LTC expense level would be deductible. All of it? Half of it? How much more than $90k would need to be withdrawn so that, after taxes, there would be $90k left to cover the bill?

Thanks!
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Old 11-12-2010, 05:21 PM   #2
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You would basically need to complete what if tax returns (actual pro forma returns or a very detailed spreadsheet). But as a really rough-super-over-simplified estimate with a $140K assumed income for a married couple:

$140,000 gross income w/ltc
($18,700) Std & PE
$121,300 AGI
$130,903 max allowable medical deduction (7.5% floor)
$90,000 actual med expense (assuming its all qualified)
$31,300 TI

$50,000 gross income w/o ltc
($18,700) Std & PE
$31,300 AGI and TI

Looks tax neutral in a vacuum.

For pete's sake don't rely on any of this, talk to your lawyer, CPA, bookkeeper and next door neighbor - it is only intended to tell you which way the wind might blow.
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Old 11-12-2010, 05:28 PM   #3
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As far as what is qualified medical for ltc - it depends but looks pretty broad:

Long-Term Care





You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts.
Qualified Long-Term Care Services





Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined later) that are:
  1. Required by a chronically ill individual, and
  2. Provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically ill individual. An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions.
  1. He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
  2. He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.


Maintenance and personal care services. Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment).
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Old 11-12-2010, 05:59 PM   #4
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$90,000 actual med expense (assuming its all qualified)
.
Thanks SunsetSail!

The issue I'm trying to understand is what portion of a projected LTC annual expense would be deductible as a medical expense. In other words, when I see that the cost of private-pay LTC in the Chicago area can be in the $90k range, what portion of that amount would qualify as "deductible." If less than 100%, then I'll need to add taxes to the annual amount I'd require to cover the taxes on the deferred account withdrawal. Just another little financial challenge!

The info you provided on "Qualified Long-Term Care Services" is useful. Thanks! I'll see if I can Google up some more detail.

And I still wonder if anyone has knowledge of data which might be used as "typical?" For example (fictional), "private-pay LTC in Boston averages $87k/yr of which $76k is typically deductible as a medical expense."

Understanding if I am really in a position to self-insure or not is turning out to be a tad more complicated than I thought it woud be. You folks that are self-insuring...... your thoughts?
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Old 11-12-2010, 06:37 PM   #5
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here's an interesting article: Tax deductions for nursing home expenses. | Legal > Tax Law from AllBusiness.com

you can google up more "is nursing home deductible"
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Old 11-12-2010, 09:16 PM   #6
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Originally Posted by kaneohe View Post
here's an interesting article: Tax deductions for nursing home expenses. | Legal > Tax Law from AllBusiness.com

you can google up more "is nursing home deductible"
Thanks kaneohe!

From the article:

Quote:
Tax deductions relating to expenses incurred for nursing home care, however, are not as easily understood and require special consideration
Hmmmmmm...... Sounds like this is going to take a little diggin' !
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Old 11-12-2010, 11:31 PM   #7
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I don't know how old you are, but $90k won't be very accurate 20 years from now. More like $200-250k per year. MetLife's recent statement put the average cost of a one-year nursing home stay at ~$83k. Figure a 5-8% annual increase and you're at $220-350k/year. A lot of things can change over the course of 20 years too...
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Old 11-13-2010, 06:57 AM   #8
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I have not looked into this from a saving and tax angle. But I think the problem is that you do not have a tax shielding account for LTC savings. The expenses can be taken off of taxes when LTC expense occur... but to my knowledge there is not an LTC savings account. Most long-term investments will have capital gains and dividends.

You would probably have to try to use your Roth IRA (no RMD). But that won't work if most of your money is in a taxable account.


IMO - The only way to make self funding actually work... is to have a lot of money. Otherwise, you run the risk of going broke anyway which defeats part of the goal. Without a large pool of money, one may be able to pay for some care (which is good and provides some flexibility) but it does not get rid of the financial risk of ruin. Plus, trying to manage that type of investment when you get old, senile and frail? Keep it liquid, manage the risk, etc. There is almost no way to get something for nothing... managing the risk costs money... you will most likely just be accepting the risk of the financial burden.


This financial problem is more complicated than retirement planning for basic income needs. The risks are even more murky than simple mortality... which is not simple.
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Old 11-13-2010, 07:16 AM   #9
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If you are healthy, you might be able to use life insurance or a combination of life insurance and a regular deferred annuity with a smaller reserve pool. But I am not sure it is going to save any money over and above LTC insurance.

The caveat related to using these contract to solve a medical risk problem is that they are not really suited for it. They are poor substitutes for LTC Insurance protection. But if you look at the problem and break it down there are two major things that need to be dealt with: A stream of money to pay expenses. And money for the survivor so they are not financially ruined.
  • Life insurance owned by each spouse could be used to ensure that after death the surviving spouse has money.
  • A single premium deferred annuity for each spouse could be used to setup income streams for each spouse at a certain age (older). Whether one is living and healthy or needing LTC... the income stream would defray some of the expense of living/care later. But because of medical inflation outpacing general inflation... this would be difficult to judge and costly. But they are guaranteed outcome solutions (in terms of money).

But you have to look at state laws for medicaid just in case your plan does not work out (assuming you are not wealthy). You do not want to be trying to figure it out at 79 years old in the middle of a crisis.


This is very complicated territory. Consider this... if the insurance companies are struggling with it... how are you going to do better (have a better outcome)?

IMO - If you are rich then self insuring might make sense. But the only way you might have a better outcome is if you do not need it (or need little of it) which involves guessing and owning the risk.
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Old 11-13-2010, 08:32 AM   #10
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Quote:
Originally Posted by dgoldenz View Post
I don't know how old you are, but $90k won't be very accurate 20 years from now. More like $200-250k per year. MetLife's recent statement put the average cost of a one-year nursing home stay at ~$83k. Figure a 5-8% annual increase and you're at $220-350k/year. A lot of things can change over the course of 20 years too...
Yeah, I understand the need to work in real dollars and that the inflation rate for LTC, and medical costs in general, will likely be higher than the general inflation rate.

Thanks for the MetLife benchmark of $83k/yr. That fits with my $90k/yr estimate pretty well......
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Old 11-13-2010, 08:53 AM   #11
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But you have to look at state laws for medicaid just in case your plan does not work out (assuming you are not wealthy). You do not want to be trying to figure it out at 79 years old in the middle of a crisis.
I have done some investigating into what it's like to have a loved one in a nursing home in Illinois with Medicaid paying. Mixed results, mostly negative, based on friends who are currently in the situation or who have recently had parents involved with this. That's part of what spurred me to get out my pencil in terms of whether we can say we're self-insured or not.

Income taxes have a lot to do with it. For example, to have $90k net for a year of LTC costs, I'd have to withdraw $125k from a deferred account, assuming a 28% marginal tax bracket, if none of the expense is deductible. If 50% of the LTC costs were deductible, then I'd have to withdraw about $105k. If the LTC expenses were 100% deductible (with zero percentage floor to overcome), then, and only then, would a $90k withdrawal work.

Quote:


This is very complicated territory. Consider this... if the insurance companies are struggling with it... how are you going to do better (have a better outcome)?

IMO - If you are rich then self insuring might make sense. But the only way you might have a better outcome is if you do not need it (or need little of it) which involves guessing and owning the risk.
Thanks for your comments chinaco. I agree there would be advantages to pooling your risk with others, as is the case with all insurance. But because the LTCI industry is in such turmoil at the moment, I'm really hesitant to begin a stream of hefty payments with an unknown outcome as to whether they will increase dramatically, if the benefit levels will be appropriate years from now or if the provider will even be in business.

So, for now, I'm trying to dive into determining what various scenarios of LTC need would do to us financially if we're self-insuring. The income tax question lept up when I realized that withdrawals made from deferred accounts to pay for LTC would have to be grossed up by your marginal tax rate to the extent that portions of LTC are not deductible as a medical expense.

If we did buy LTCI, what we'd be looking for is a policy that has a long waiting period (one year or more) and correspondingly lower premiums. Haven't been able to find one of those yet.
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Old 11-13-2010, 09:01 AM   #12
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You can use this calculator to play "what if".
http://turbotax.intuit.com/tax-tools...ors/taxcaster/
Assuming MFJ,
50K normal income, both age 65......90K LTC expenses, no other deductions. You can tailor to your own situation.
1)assuming LTC 100% deductible, need about 5K more to pay taxes = 95K withdrawal from IRA
2)assuming LTC 50% deductible, need about 20K more to pay taxes = 110K withdrawal from IRA

This is really just a mechanical exercise.
You still don't know what % of LTC is deductible and I thought I read that in the future the floor for deductible medical will increase from 7.5% of AGI to 10% which will make things a bit worse.

I'm not sure what folks mean when they say self-insure. Do they have a bucket of $$$ they dedicate to a specific purpose and don't touch otherwise. If you do it yourself, you have to save the whole bucket. If you do it via insurance, you have to save your statistically shared part of the pool, which at least in principle is (significantly?) less than the whole bucket. I have some of the same questions as Chinaco.......if the insurance companies are having problems because their cost models are bad, won't that also affect your self-insured model too.
.......and unless you already have the bucket amount saved already, aren't you running a difficult race because you have to fill the bucket and keep up w/ the inflating costs at the same time as dgoldenz suggests.
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Old 11-13-2010, 10:02 AM   #13
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My DW/me made the decision to self-insure after several discussions with our elder-law attorney.

His practice has been in place for many, many years and he has seen many elderly go through this same "exercise". In some cases, he recommended LTC (due to net worth and tax situations); in others, he recommended self-insurance.

While we certainly are not wealthy, but in our situation (and along with his input), we decided to self-insure.

It is not an easy decision to make, and I would recommend that anybody discuss this with any "elder resource" that they can, to review their situation (yes, including health history) to decide.

For those that are conserative in nature, or have great financial resources? Then it's a bit easier to form a course of action, IMHO...
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Old 11-13-2010, 10:15 AM   #14
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Quote:
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You can use this calculator to play "what if".
TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator
This is really just a mechanical exercise.
True. But my question isn't how to estimate the taxes...... been there, done that. I'm inquiring if anyone has any experience or source of information regarding what percentage of LTC expenses is typically deductible. That number seems to be the toughest one to come up with. SunsetSail's pointer regarding info on qualified LTC services is useful, but is going to require some digging.
Quote:

I'm not sure what folks mean when they say self-insure. Do they have a bucket of $$$ they dedicate to a specific purpose and don't touch otherwise.
I'm not doing it that way. I'm not a fan of separate "buckets" for any reason. In our case, we have some slack in our budget (vs. our resources) and I'm assuming that if the need for several years of LTC jumped into our lives, we'd pay it from the FIRE portolio. That would take the slack to zero or even require a reduction in retirement spending. My calculations are aimed at taking a little peek at how bad it would be under various scenarios.
Quote:
If you do it yourself, you have to save the whole bucket. If you do it via insurance, you have to save your statistically shared part of the pool, which at least in principle is (significantly?) less than the whole bucket. I have some of the same questions as Chinaco.......if the insurance companies are having problems because their cost models are bad, won't that also affect your self-insured model too.
Yes, the variabilities of LTC do impact planning for self-insuring. It's a mess really. I believe in insurance. I carry quality policies on the house, cars, umbrella liability, medical, etc. But right now, buying LTCI with confidence isn't an easy thing to do. As I said in an earlier post, if I could find a policy from a high quality company with a one year or longer waiting period (and correspondingly lower premiums) I'd definitely look at it. For now, I'm working on understanding how "self-insured" I am. And, btw, we're retired and past the accumulation phase. What we have is what we have. So I'm running my scenarios vs our ongoing income + FIRE portfolio net of amounts that an episode of LTC needs might subtract from that. Tax deductibility is a significant part of the equation and seems to be a bit of a gray area.
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Old 11-13-2010, 10:51 AM   #15
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..... in our situation (and along with his input), we decided to self-insure.
Could you/would you share any of the key assumptions in the decision process?
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Old 11-13-2010, 11:05 AM   #16
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But because the LTCI industry is in such turmoil at the moment, I'm really hesitant to begin a stream of hefty payments with an unknown outcome as to whether they will increase dramatically, if the benefit levels will be appropriate years from now or if the provider will even be in business.
I think a dramatic increase is likely, because it is in the insurance company's interest, once you've paid LTCI for a few years, to force you to drop the insurance. That way they never need to pay out.
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Old 11-13-2010, 11:11 AM   #17
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Originally Posted by rescueme View Post
My DW/me made the decision to self-insure after several discussions with our elder-law attorney.

His practice has been in place for many, many years and he has seen many elderly go through this same "exercise". In some cases, he recommended LTC (due to net worth and tax situations); in others, he recommended self-insurance.
.....

Yes.

IOW - if it happens spend down and go on Medicaid.

This will happen to most people. That is why it is so important to understand the medicaid laws of one's state and plan around it to try to minimize the impact... ultimately the impact on the surviving spouse. There are states where (depending on ones situation) people (living near the border) would be better off moving across the border to a neighboring state because the rules are different and better suit their circumstances. But many of these types of decisions cannot be made at the last minute.
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Old 11-13-2010, 12:00 PM   #18
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Could you/would you share any of the key assumptions in the decision process?
I'm sorry, but that would entail too many "personal details" in our estimated current/terminal estate value, along with details related to the existing trust we hold, along for the trust for our disabled (adult) "child". In addition, there are taxable "methods" that we have incorporated into our terminal estate (both for my DW/me, and also upon the passing of our son) that apply to us, alone. Some of the items related to taxes will not take effect until his passing - and assuming tax laws are generally the same as today, concering estate law.

It's not an easy path to travel, and certainly there is no "Chinese Menu" (one item from the first column, two from the second) to choose.

Also (respectfully), we did pay a price for the "suggestions" we received. It was not cheap, but it was not a problem in our specific situation.

Let's just say that our "custom solution" (while not inexpensive) did put our respective minds to rest.

I regret that I cannot offer more than that, for your question...
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Old 11-13-2010, 12:02 PM   #19
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I'm sorry, but that would entail too many "personal details" in our estate, along with details related to the existing trust we hold, along for the trust for our disabled (adult) "child".

It's not an easy path to travel, and certainly there is no "Chinese Menu" (one item from the first column, two from the second) to choose.

Also (respectfully), we did pay a price for the "suggestions" we received. It was not cheap, but it was not a problem in our specific situation.

Let's just say that our "custom solution" (while not inexpensive) did put our respective minds to rest.

I regret that I cannot offer more than that, for your question...
Understood. Thanks.
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Old 11-13-2010, 02:25 PM   #20
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Yeah, I understand the need to work in real dollars and that the inflation rate for LTC, and medical costs in general, will likely be higher than the general inflation rate.
Would that be in what will be known as "Classic dollars", in "New dollars", or in yuan?

There's an entire thread's worth of parallels in "saving for college" and "saving for LTC"...
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