ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, February 3, 1997 TAG: 9702040008
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: Tax Questions
Q: Are premiums for long-term health insurance (nursing and home health) and other health insurance tax deductible? If so, where does it appear on the tax form?
A: Insurance premiums for health insurance that covers medical care are deductible by an individual as medical expenses. Medical expenses are deductible as itemized deductions on line 1, Schedule A of Form 1040.
Health insurance premiums that are deductible are those paid for hospitalization, physician services, prescriptions, surgical fees, etc. Premiums for long-term care are not deductible in 1996, but will be deductible in 1997 as a medical expense if the policy meets certain requirements. This change in the tax law was made in 1996 legislation.
"Qualified long-term care insurance" is insurance that provides coverage only for qualified long-term care services, does not pay costs that are covered by Medicare, is guaranteed renewable, and does not provide for a cash surrender value. A policy is not disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred during the specific payment period.
"Qualified long-term care" services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services required by a chronically ill individual provided under a plan of care presented by a licensed health care practitioner.
For individuals 40 years old or younger, the limit on deductible long-term care insurance premiums is $200 per year; for individuals 40 to 50, $375; 50 to 60, $750; 60 to 70, $2,000; and, over 70, $2,500. These limits are per individual. Thus, a married couple filing jointly, each of whom is over 70, can deduct up to $5,000 a year in premiums.
The costs of qualified long-term care or insurance for such care are not necessarily deductible for all taxpayers. These rules merely state that they may be included in deductible medical expenses. These are only deductible to the extent they exceed 7.5 percent of adjusted gross income. For example, if a married couple filing jointly has adjusted gross income of $80,000, only medical costs in excess of $6,000 ($80,000 multiplied by 7.5 percent) may be claimed as itemized deductions.
-Answered by F. Fulton Galer of McLeod & Company.
Q: We plan to take advantage of Virginia's Prepaid College Tuition Program. We have purchased U.S. Savings Bonds, Series EE, in our names. The total amount of prepaid tuition we need to pay is a little over $16,000. What are the tax consequences if we cash in these bonds to pay for the tuition?
A: An individual who pays qualified higher education expenses during a tax year may exclude from that year's gross income any amount, subject to limits, of income from the redemption of any "qualified U.S. Savings Bond."
In the case of Series EE bonds, the bonds must be issued after 1989. The exclusion is not available to the owner of bonds that were bought by another individual. Nor is it available to a parent who buys the bonds and puts them in the name of a child or other dependent. If you are married, you must file a joint return to get the exclusion. You must have purchased the bonds after you reached age 24. The exclusion is available only if you redeem the bonds. It is not available if you transfer the bonds to the educational institution.
The total redemption proceeds (principal plus interest) for a tax year must not exceed the qualified higher education expenses paid that year. If it does, then the amount of excludable interest is limited.
The excluded interest also depends on the taxpayer's income. The excluded interest is phased out for a taxpayer whose 1997 modified adjusted gross income for the year exceeds $76,250 (for a joint return).
The interest is completely excluded for joint taxpayers whose 1997 modified adjusted gross income is equal to or less than $76,250. No portion of the interest is excludable for joint taxpayers whose 1997 modified adjusted gross income is at least $106,250. For joint taxpayers whose 1997 modified adjusted gross income is between $76,250 and $106,250, the amount of excludable interest is gradually phased out the closer their adjusted gross income is to $106,250. These income limits are adjusted for inflation each year. Different income limits apply to single taxpayers.
Modified adjusted gross income is determined without the savings bond interest exclusion, the exclusion for income earned abroad, the exclusion for post-1996 employer provided adoption assistance, and after consideration of Social Security, passive activity losses and IRA contributions.
Taxpayers must use Form 8815 to compute the interest exclusion.
-Answered by Valerie Kowalski of Kowalski & Associates.
Tax-related questions from our readers are answered by members of the Roanoke chapter of the Virginia Society of Certified Public Accountants. This feature runs every Monday on the Money Page through April 7. Please send your questions by March 30 to: Tax Questions, The Roanoke Times, P.O. Box 2491, Roanoke 24010.
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