Deductions for Long-term Care Insurance

Nursing homes and other long-term care arrangements are so expensive that many people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case.

The typical long-term care insurance policy will pay for custodial care after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.

If you are thinking about buying long-term care insurance, you’ll be interested to know that, within limits, premiums paid for qualified policies are deductible as an itemized medical expense. Premiums are eligible for a deduction only up to a specific dollar amount (adjusted for inflation) that varies depending upon the age of the covered individual. The IRS limits for 2008 are:

	Age		Premium Limit
	40 or under		$310
	41-50		$580
	51-60		$1,150
	61-70		$3,080
	Over 70		$3,850

These limits apply on a per-person basis. For example, a married couple over age 70 filing a joint tax return could potentially deduct up to $7,700 ($3,850 × 2). Keep in mind, however, that itemized medical expenses are deductible only to the extent that they, in total, exceed 7.5% of adjusted gross income (AGI).

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The Ins and Outs of Installment Sales

If you sell real property or a business at a gain and will receive one or more payments from the buyer after the close of the tax year, you generally are required to report the sale as an installment sale for tax purposes. This method can be advantageous because it allows you to defer taxable income. You include in current-year income only a proportionate amount of your gain plus the interest you receive each year until you are paid in full. That way, you can use a portion of each year’s installment collections to pay the taxes due.

Example. Dennis sells business property for a cash down payment and a note. Under the installment method, he reports part of his gain in the year of the sale and the remaining gain over time as he receives principal payments on the note. The alternative, reporting his entire gain in the year the sale occurs, doesn’t appeal to Dennis because he won’t have the cash to meet his tax obligation until he receives the note payments from the buyer.

In some situations, however, “electing out” of the installment method and reporting the entire gain up front is more beneficial. That might be the case, for instance, if you’ll receive large payments from the buyer after 2010, when the capital gains tax rate is scheduled to be higher than it is now. Similarly, if you have a capital loss that can offset your entire gain in the year you sell your property, you may want to elect out of installment sale treatment.

Note that the installment method isn’t available for certain sales, including sales of publicly traded securities.

Mortgage Relief

For 2007-2009, acquisition debt forgiven with respect to a homeowner’s principal residence will not represent taxable income. This special provision is designed to assist homeowners who lose their homes in foreclosure or have their mortgages restructured. Limits apply.

Mortgage Insurance Deduction

The deduction for home mortgage insurance premiums has been extended through 2010. It had been set to expire after 2007.

Trust Fees

The U.S. Supreme Court has held that investment advisory fees paid by a trust are deductible only to the extent that, together with other miscellaneous expenses, they exceed 2% of adjusted gross income.

Bad Debt Deduction

If a company fails to repay its shareholders for business expenses they paid personally, are the shareholders entitled to a bad debt deduction? Only if there was a bona fide debt, says the Tax Court in a recent decision.