The Tax Deductibility of Tax-Qualified Long-Term Care Insurance (LTCI) Premiums Presenter Name Presenter Title For agent & financial professional training purposes only. Not for use with the public. John Hancock Life Insurance Company, Boston, MA LTC /2006 Revised 2/2009

Individual Deduction Itemized medical expenses (including LTCI premiums) Exceeds 7.5% of Adjusted Gross Income (AGI) Portion of LTCI premium limited to the Eligible LTCI Premium (seen on next slide) Includes Eligible LTCI Premiums paid for spouses and dependents [IRC 161(l)] Generally, benefits received from Tax-Qualified LTCI are excluded from gross income [IRC 7702B and 104(a)(3)]

Eligible LTCI Premiums 2009 Table $ or Younger $ $1, $3, or Older $3,980 For taxpayers that itemize their deductions, eligible premiums can be included with their medical care expenses.

Individual Example Basic Information Age of Individual55 Adjusted Gross Income (AGI)$55,000 Medical Expenses (Excluding LTCI premium)$4,000 Annual Premium for Tax-Qualified LTCI policy$2,000 Calculating the Deduction Eligible LTCI Premium (From Table 1)$1,190 Total Medical Expenses$5,190 ($4,000 + $1,190) 7.5% of AGI$55,000 X 7.5% = $4,125 Medical Expenses exceeding 7.5% of AGI$1,065 ($5,190 - $4,125) Total Itemized Deduction$1,065 AGI Less Itemized Deduction$53,935 ($55,000 - $1,065)

Self-Employed Individual Deduction Itemized medical expenses (including Eligible LTCI premiums) Portion of LTCI premium limited to the Eligible LTCI Premium Includes Eligible LTCI Premiums paid for spouses and dependents [IRC 161(l)] Not necessary to meet 7.5% (AGI) threshold Generally, benefits received from Tax-Qualified LTCI are excluded from gross income [IRC 7702B and 104(a)(3)]

Self-Employed Example Basic Information Age of Self-Employed Individual55 Gross Income$60,000 Annual Premium for Tax-Qualified LTCI Policy $2,000 Calculating the Deduction Eligible LTCI Premium (From Table 1)$1,190 Gross Income Less Deduction$58,810 ($60,000 - $1,190)

Partnership / Limited Liability Company (LLC) / Subchapter S Corp Treated as self-employed –Partners of a partnership –Members of LLC that is taxed as a Partnership –Shareholders/employees of Subchapter S Corporations who own more than 2% of the outstanding or voting stock of S Corp The partnership, LLC, or Sub S Corp pays the LTCI premium –The partner, member or shareholder must include the LTCI premium in Adjusted Gross Income, but can deduct age based Eligible LTCI Premium –Not necessary to meet the 7.5% AGI threshold

Subchapter C Corporation A C Corporation purchasing a TQ LTCI policy on behalf of employee, his/her spouse or dependents –Deduct 100% of TQ LTCI premiums paid as a business expense –Not limited to the age-based LTCI premium amount from the table –The corporation can discriminate LTCI Premium excluded from employee’s Adjusted Gross Income 2% or less shareholder/employees of Subchapter S Corporation are treated as employees

Employer Paid Example Basic Information Premium Paid by Subchapter C Corporation $20,000 ($2,000 premium X 10 individuals) Calculating the Deduction Total Business Expense Deduction$20,000 Calculating the Exclusion Amount Excluded from Each Employee’s Gross Income $2,000

Employer-Pay Contributory Arrangement on Behalf of an Employee If only a portion of the employee premium is paid by the employer –Employee may include the portion of the premium he/she pays (up to the age-based limits for Eligible LTCI Premium) with their itemized medical expenses Generally, benefits received under a TQ LTCI policy that was purchased by an individual will be excluded from gross income. Premiums paid by the employer are also excluded from gross income.

Partial Employer Pay Example Basic Information Age of Employee55 Adjusted Gross Income$55,000 Medical Expenses (Excluding LTCI premiums)$6,000 Premium Paid by Employee$1,500 ($2, $500 ER paid) Calculating the Deduction Eligible LTCI Premium (From Table 1)$1,190 Total Medical Expenses$7,190 ($6,000 + $1,190) 7.5% of AGI$4,125 ($55,000 x 7.5%) Medical Expenses Exceeding 7.5% of AGI$3,065 ($7,190 - $4,125) Total Itemized Deduction$3,065 AGI Less Itemized Deduction$51,935 ($55,000 - $3,065)

Gift Tax Exclusion For 2009, annual $13,000 per donee Gift Tax Exclusion Donor has the ability to pay for the medical expenses of a donee Includes Tax-Qualified LTCI premiums Exclusion is subject to the age-based Eligible LTCI premium table

Gift Tax Exclusion Example Basic Information Annual Gift Tax Exclusion$13,000 Age of LTCI Policy recipient (Donee)55 Annual Premium for Tax-Qualified LTCI Policy (Paid by Donor) $1,500 Calculating the Exclusion Eligible LTCI Premium (from Table 1)$1,190 LTCI Premium Amount that Would Reduce the Annual Gift Tax Exclusion $310 ($1,500 - $1,190) Donor’s Reduced Annual Gift Tax Exclusion Amount $12,690 ($13,000 - $310)

HSA / HRA / Cafeteria Plans / FSA Health Savings Accounts (HSA) –LTCI premiums can be reimbursed through a HSA, tax free, up to the limits in the Eligible LTCI Premium table, even if offered through an employer provided Cafeteria Plan Health Reimbursement Accounts (HRA) –Reimbursement for LTCI premiums are allowable under an HRA. Although employers pay for HRAs, an HRA cannot be provided by salary reduction or through Cafeteria Plans Cafeteria Plans –LTCI policies cannot be purchased with pre-tax dollars under an employer-provided Cafeteria Plan Flexible Spending Accounts (FSA) –LTCI premiums cannot be reimbursed through an FSA

The Tax Deductibility of Tax-Qualified Long-Term Care Insurance (LTCI) Premiums Presenter Name Presenter Title For agent & financial professional training purposes only. Not for use with the public. John Hancock Life Insurance Company, Boston, MA LTC /2006 Revised 2/2009