Many finance professionals do not include long-term care insurance when planning tax with their clients. However, for customers in certain tax brackets, having more income to cover the cost of advanced care could have a negative impact on their tax burden.
Would an additional $ 100,000 annual payout from investments affect a client’s tax planning? Most finance professionals would answer “yes”. How customers fill their retirement income gap is effectively lowering or increasing their tax rates.
Some finance professionals say customers will simply “cut back on their retirement lifestyle to make up for increased caregiving dollars,” but this is not the reality for most couples. The following “napkin concept” is a very simple way to show exactly how LTC spending can affect income:
“Mr. and Mrs. Jackson – You are currently taking $ 80,000 annually out of your IRA and earning $ 66,400 after-tax income. If you had an advanced care event and you needed someone to come to your home, to shower, go to the toilet or get dressed – estimated at 40,000 USD per year – would you rather have an income of 24,400 USD or 106,400 USD with additional planning? “
It’s hard to imagine that a customer would choose the lower number.
If a client chooses to withdraw more money from an individual retirement account to pay that bill (rather than insuring the risk), they would have to withdraw $ 128,000 from their IRA, which would push that person (for taxes filed for 2020) out of the IRA 12% tax bracket to 22% tax bracket.
If the customer chooses to insure all or part of this risk, the original pool of funds earmarked to fund advanced care needs can be converted into a hybrid LTCi product. Now the money can be used tax-free towards a qualifying LTC issue, and if never used, your heirs will inherit a tax-free death benefit.
Remember, Eligible LTCi Awards and Expenses are deductible personal medical expenses for those making a listing.
Entrepreneurs (depending on the type of company) are also tax deductible. For example, a self-employed person can deduct 100% of the premium paid for the individual, as well as the spouse and loved ones, up to the maximum amount allowed based on the government’s 2020 age table without taking into account the 10% adjusted gross income rule.
Think of clients who have money in IRAs, annuities, or other brokerage accounts that they use for emergency funds. Instead of keeping the money in a taxable account, consider converting those fiscally inefficient dollars into a tax-free solution that offers additional leverage.
There are many annual occasions, life events, and review opportunities that would be a natural time to discuss advanced care planning. Do not miss this opportunity!
Eileen Shovlin is the Regional Director of Sales for Crump Life Insurance Services. She can be contacted at [email protected].
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