Several States Consider Long Term Care Tax For Those Who Do Not Own LTC Insurance

A number of states and the federal government have offered tax incentives for many years encouraging people to buy Long-Term Care Insurance. Washington State recently implemented a Long Term Care Tax for those who don’t own a qualified Long-Term Care Insurance policy. Following Washington’s example, many states are now looking at taxing your wages unless you have a qualified Long-Term Care Insurance policy.

The action taken by Washington State surprised many residents as they were given limited time to get a qualified Long-Term Care Insurance policy. Without private LTC insurance, people will be taxed 58 cents on every $100 earned. This created so much outcry that the Washington Governor later signed a law delaying the start date until July 1, 2023. But the delay did not extend the limited time allowed to buy coverage to avoid the new Long Term Care Tax.

For those without private LTC insurance, the new LTC payroll tax will provide a state-supplied Lifetime Benefit of $36,500 for long term care needs. Considering that Washington State has some of the highest long-term health care costs in the country, $36,500 does little to protect an individual from long-term care costs.

To put this in perspective, Washington State’s average annual cost for Nursing Home care is over $125,000, and is projected to be over $225,000 in 20 years. Even a Home Health Aide for in-home care is almost $80,000 (44 hours per week) and is projected to cost over $140,000 in 20 years.

Schedule Meeting With a Long-Term Care Insurance Specialist in Your State. Know your options and get no-obligation quotes today!

Lawmakers Reasoning For A Long Term Care Tax

Lawmakers want the tax to help shore up the Medicaid program, the country’s number one payor of LTC costs. Not to be confused with Medicare, Medicaid is the nation’s public health insurance program for people with low income. To get care paid for by Medicaid, one must have little or no income and assets. Because many families fail to plan ahead for their long-term health care needs, they must deplete assets and rely on Medicaid. This has created an enormous burden on Medicaid that is growing with inflation.

Declines in health due to age, illness or accidents can cause the need for long-term health care. When someone requires help with their daily living activities or needs supervision due to dementia, they need Custodial Care. But custodial care is not covered by traditional health insurance or Medicare. Without a long-term care plan, individuals must pay for their own care, or have family members become caregivers. Critics of the tax argue that a small state-supplied benefit, covering a fraction of one year of care, isn’t the answer.

States Considering a Long Term Care Tax

Following Washington, several other states are moving to start their own Long-Term Care Tax programs. California, Michigan, Minnesota and New York appear the closest to implementing a Long Term Care Tax. Here’s a partial list of states considering similar laws: Alaska, Colorado, Hawaii, Illinois, Maine, Missouri, Montana, North Carolina, Oregon, Pennsylvania and Utah.

Important points to consider before a plan is enacted in your state:

• Limited or No Opportunity to Opt Out – A big unknown is whether states will give their residents advance notice to avoid the Long Term Care Tax by buying private LTC Insurance. It can take 6 – 8 weeks to apply and  be approved for coverage. Because of this limited notice, many Washington residents were not able to buy private insurance and avoid the LTC payroll tax. Due to this being a one-time only exemption, the residents that missed the deadline will have to pay this tax for as long as they are employed in Washington, with very few exceptions.
• No Cap on Taxes – Because the tax has No Cap (applied to all your income), the more money you make the more you pay. This is how the Washington program works and we don’t yet know if other states will do the same.
• State Supplied Benefits Are Very Low – As outlined above, the Washington State program has a Lifetime Benefit of $36,500. Far from adequate in a state where the annual cost of care is over $125,000. Initial details released from other states tells us they are considering similar benefit levels.

California Long Term Care Tax

California now has a Long-Term Care Insurance Task Force exploring the implementation of a Long-Term Care Tax. Latest indications are that the plan may be implemented as soon as 2024.

California may allow a short amount of time for individuals to buy Long-Term Care Insurance to avoid the an LTC Payroll tax. This detail is unknown at this time.

New York Long Term Care Tax

In New York, Senate Bill S9082 will enact a plan much like the one in Washington. But they will not give residents much time to buy LTC Insurance. In fact, the bill mandates that coverage be in force before the law goes into effect. Additionally, any employed person who cancels their Long-Term Care Insurance must notify the state. They must then pay the LTC payroll tax. The payroll deductions would begin two years after the law is adopted.

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LTC Payroll Tax and Younger Workers

There are some compelling reasons why younger workers will want to exempt themselves from an LTC Payroll Tax. Normally we suggest planning for future long term care needs when you reach your 50s. But, this scenario of being forced to pay a state Long Term Care Tax the rest of your working years is a strong motivator to buy private Long Term Care Insurance now. Consider the following:

• Younger workers with high earning potential stand to save the most. Especially if your state has No Cap on the amount of Long Term Care Tax you’ll be paying.
• Hybrid Life Insurance policies with a qualified long-term care rider (meeting the legal requirement under Section 7702(b) of U.S. Code) are affordable. These Hybrid LTC plans meet the important need for life insurance while meeting the qualified long-term care benefit needed to exempt you from an LTC Payroll Tax.
• With a 10-Pay or Single Payment option there’s no risk of rate increases.
• Premiums are significantly lower at younger ages, plus you lock-in the good health you have today.
• When buying Long-Term Care Insurance, try not to buy the smallest plan available to avoid the Long Term Care Tax. A well-designed Long-Term Care Insurance policy will protect income and assets from the high cost of extended care. And you’ll be able to choose high quality care, including in-home care, without burdening your family. Plus, LTC insurance also protects your 401(k) and other retirement accounts.

Qualified LTC Insurance Policies – Federal Code 7702(b)

As happened in Washington State, you may have little notice before your state enacts a Long-Term Care Tax. Don’t wait to get protection! To avoid being taxed, you must have a tax-qualified Long-Term Care Insurance policy following Section 7702(b) of the U.S. Code.

Work with a Long-Term Care Insurance specialist who represents many top-rated companies. Know that insurance premiums can vary widely between companies for similar coverage and your health history is critical when applying for coverage. Your LTC Specialist Agent will match your age, health, and family history with the right company.

Don’t focus on avoiding the long-term care payroll tax. Instead, get a quality long-term care plan, unless you have little income and don’t expect your earnings to increase. Yes, it may be possible to replace or add to your coverage later. But that would be based on your age and health at the time which may not be feasible.

Few employer-sponsored Group LTC plans exist. Those available often not your best option, unless you have health issues limiting your choices. In that case, a Group LTC Plan may work best because it may have more relaxed health underwriting requirements.

Federal LTC Tax Incentives

Washington DC is not coming to the rescue with LTC coverage. There have been some proposals to enact a national plan, but with little backing. President Biden has talked about expanding tax incentives if you buy coverage. But congress has little support to do more than what they have already done. Current federal long-term care tax incentives will continue.

Start Your LTC Planning Today!

• The risk of needing long-term health care at some point in your life is real, and the states lack the funds to pay for everyone’s future care.
  Being prepared is a good idea – tax or no tax.
• More states are looking at legislation as a way to handle the increasing issue of aging and long-term care costs. Be proactive with your long-term care planning. Don’t wait until you’re left with a small window to opt-out of a coming tax. In Washington, the demand for coverage was overwhelming and some companies stopped selling coverage. Meanwhile, other providers set minimum coverage levels. As a result, consumers were left with few choices.
• Prices are based on your existing age so premiums will never be less than today. And you must have good health to qualify so a change in health could make you uninsurable.

Source: LTCinsuranceconsultants.com