There's also a maximum deductible amount, depending on the person's age at the end of the calendar year. For 2010 taxes, the upper limit is $330 for people age 40 or younger. It jumps to $620 for ages 41 to 50, $1,230 for ages 51 to 60, $3,290 for ages 61 and 70, and $4,110 for people 71 or older. These limits increase annually.

If there is an age difference between spouses, they can maximize the deduction with a "shared-care" LTC policy, which allows couples to divide benefits as needed. For example, if the husband uses three years of benefits in a 10-year shared-care plan, the wife retains the remaining seven.

In addition, those in a high deductible health insurance plan with a Health Savings Account can use the HSA to pay their LTC insurance premiums.

But if an employer pays all or even part of the premiums, the employee is not eligible for these deductions unless he or she is part owner of a partnership, LLC or Subchapter S Corporation. If the partner's spouse is an employee of the partnership, the full premium on the spouse's policy can be deducted, too.

LTC insurance benefits are never considered taxable income if they are used for legitimate long-term-care expenses, such as nursing homes or, in many cases, home-based assistance.

Deductions For Small Businesses
Small business owners can deduct the cost of LTC insurance for themselves, their spouses and other dependents. As a business expense, it's 100% tax-deductible.

Business owners should also know that LTC insurance can be offered to select employees, their spouses, and even retirees. Business owners can set the rules that determine who is covered and who isn't.

If LTC insurance is offered to employees, the employer does not have to pay payroll taxes on the premiums. The employees aren't taxed on the premiums paid by their employers, either.

Self-Employed Clients And Other Special Situations
The rules are somewhat different for self-employed people, who can deduct 100% of their out-of-pocket LTC insurance premiums up to the age-based limits delineated above. For the self-employed, it's not necessary to meet the 7.5% threshold to take this deduction. The deduction can include spouses and dependents.

A Subchapter S Corporation that buys a policy on behalf of any of its employees or their dependents is entitled to a 100% deduction as a business expense, just like any other type of employer. The deduction is not limited to the age-based cutoff.
And like any other type of employer, the Subchapter S Corporation can be selective in classifying which employees it chooses to cover under the LTC insurance policy.