Just when you thought there was nothing left to tax, some states are now beginning to implement a tax on people who do not have long-term care insurance.
Whether it is to address the issue of people failing to prepare for the possibility of needing long-term care or just a way to raise funds; 13 states are currently considering taxing those without a long-term care insurance policy. Those states are Alaska, California, Colorado, Hawaii, Illinois, Michigan, Minnesota, Missouri, North Carolina, New York, Oregon, Pennsylvania and Utah.
Seniors aged 65 have a nearly 70 percent chance of requiring long-term care services in the future, and on average, the stay will be for three years. The cost of this service today can easily exceed $300,000! Yet only about 7 percent of Americans own a private long-term care policy. That represents a significant gap in care for those who need it most.
Many people think they will just rely on Medicaid if they end up needing long-term care. However, you must have little to no income and assets to qualify for Medicaid. In most states, the monthly income limit is $2,382 for individuals or $4,764 for spouses. Your countable resources must be less than $2,500. Income and resources that count toward the limit include your wages, Social Security benefits, pensions, veteran benefits, bank accounts, stocks and bonds, trusts and annuities, and property and life insurance.
Medicare generally doesn’t cover long-term care stays in a nursing home or extended home care.
How We Got Here
In 1965, Medicaid was established as a joint federal and state program to provide health care to low-income individuals. While Medicaid was primarily designed to provide medical care to children and pregnant women, it also covered long-term care for the elderly and disabled.
However, Medicaid was not intended to be the primary source of funding for long-term care, and as the population aged, the strain on the program increased. We view the new tax as a way for states to try to prop up this system.
Despite the government’s involvement in funding long-term care, there is still a significant gap between the need for care and the available resources. In 2021, the median annual cost of a private room in a nursing home was more than $100,000, and the average cost of in-home care was more than $50,000 per year.
As the demand for long-term care continues to grow, many states are considering implementing a long-term care tax to help bridge this gap. This tax would be levied on all workers and would be used to fund programs that provide long-term care services to those in need. Proponents of the tax argue that it would provide a stable source of funding for these programs and would help ensure that all individuals have access to the care they need.
Washington State Led the Way
In Washington state, those who do not have a private long-term care policy are now subject to an income tax, even though Washington does not have a regular state income tax!
In Washington, where the mandate has already passed, residents were given a grace period to purchase a long-term care insurance policy to avoid the payroll tax of 58 cents on every $100 earned. Known as the Washington Cares Fund, this legislation, signed into law in 2019, provides access to a lifetime benefit amount that can be used on a wide range of long-term services and supports. W-2 workers are expected to begin contributing to the fund in July 2023 with the first benefits available in July 2026.
The launch of this program was originally planned for January 2022, but it has been delayed. Critics have cited problems with the payroll deductions for the program, which was then pushed back to July 2023, with benefits only becoming available in July 2026.
A key aim of the program is to provide relief for middle-class families that are forced to spend their life savings to receive long-term care through Medicaid. In reality, the benefit of the Washington program appears minimal.
Over time, nearly all Washington state residents will contribute premiums via a mandatory payroll tax, and the benefit is universal. Starting in 2026, participating residents will be able to claim a benefit if they have a demonstrated need for assistance with three or more activities of daily living. The maximum lifetime benefit of $36,500 will be adjusted annually for inflation; it is geared to cover about one year of care at home. Ten years of contributions are required to qualify to receive the benefit, but near-retirees will be able to receive a partial benefit starting in 2026 geared to the number of years that they have contributed.
What happens if someone doesn’t have a long-term care insurance policy? Such individuals may qualify for the state-supplied benefit, which allocates $36,500 for lifetime extended-care needs. This is just a token amount — not nearly enough to cover the full costs of long-term care needs, especially in places with a higher cost of living, like Washington, where the average cost of in-home care is around $6,700 per month. Also, the cost of nursing homes is expected to rise from $12,000 a month to an average of $23,000 per month by 2050. This is hardly enough even cover a few months of long-term care.
The Tax Is a New Way to Fund Medicaid
The new long-term care tax is intended to fund the Medicaid program, the country’s primary payor of long-term health-care expenses. For this reason, other states hope that introducing the new tax will relieve some of the financial pressure on the government-run Medicaid program and provide sufficient long-term care support and services to low-income citizens.
Frankly, this is just another way for states to raise money, and we expect this trend to become more widespread.
One key question is whether states give their residents enough advance notice to obtain long- term care insurance to avoid the tax. For those who are eligible, it can take approximately six to eight weeks to apply and get approved for long-term care coverage. In Washington, many residents ran out of time to obtain long-term care insurance because they were given only a short amount of time to apply.
Another concern is that the tax is based on a resident’s earned income and does not come with a cap. This means that the more money someone earns, the more tax they pay, leaving mid-to- high-income earners worried about the high tax they will need to pay.
We Will Help You Find a Suitable Solution for You
We believe long-term care insurance can be a very valuable tool for protecting both your assets and your lifestyle. While some people may have enough money to self-insure, the potential expense can be huge.
We view long-term care insurance as a way to avoid going to a nursing home or facility and have a way to pay to stay at home. The problem is that in many states, including Ohio, the availability of Long-Term Care insurance is limited and may be expensive.
There are options, though, and our team has extensive experience in finding the ideal long-term care solution to meet each client’s individual needs. For example, in addition to traditional long- term care insurance, there are so-called “hybrid policies,” which are annuities or life insurance policies that provide home health care and long-term care benefits.
Our experienced team will work with you to determine what long-term care asset-protection strategy may make sense for you. There is a myriad of long-term care insurance policies to help protect your assets — and more importantly, your lifestyle. What, if any, type of policy makes sense for you will depend on your personal circumstances. We are happy to review options that may make the most sense for you at any time.
We are monitoring the legislative changes, and how they may impact our clients.
The issue of long-term care funding is complex and multifaceted, and there are no easy solutions. While implementing a long-term care tax may help address some of the funding gaps, it is not a panacea.
We will work with you help that you have suitable protection so you can ensure the best quality of life possible, now and into the future.
Please note we are hosting a free public event on September 19th to discussing how to help preserve your wealth. This will be held at 7 pm at The Everly (Mentor OH). See more information at https://carverfinancialservices.com/9-19-23-a-caregivers-guide-to-planning-for-those-with-dementia/
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Randy Carver and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.
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The cost and availability of Long-Term Care or Asset Based Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased and may not be suitable for all investors. As with most financial decisions, there are expenses associated with the purchase of Long-Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.
Randy Carver, CRPC®, CDFA®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Carver Financial Services, Inc., was established in 1990 with the vision of making people’s lives better — clients, team and community. With this mission, Carver Financial Services has grown to be one of the largest independent financial services offices in the country, managing $2.3 billion in assets for clients globally, as of March 2023. You can reach Randy directly at email@example.com and in the office at (440) 974-0808.