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By Daniel Side, CFP® – Financial Planning Officer

For years, Missouri has offered an income tax deduction for long-term care insurance policy premiums to mitigate the rising costs of long-term care and average time spent in long-term care facilities. As of 2021, the state has introduced a new option: the Missouri Long-Term Dignity Account.

This tax break is designed for Missouri residents who are interested in supplementing their long-term care insurance coverage, who may be unable to qualify for long-term care insurance coverage, or who simply prefer to “self-insure” against this risk. The tax benefits and flexibility provided within this program make it a compelling option.

How does the Missouri Long-Term Dignity Account work?

Opening the Account

  • Create a new account with any financial institution and designate it entirely as a “Long-Term Dignity Savings Account.”
  • The account can be held individually or jointly for married taxpayers filing jointly.
  • A Transfer on Death (TOD) designation is allowed.

Funding the Account

  • Contributions are capped annually at $4,000 per taxpayer or $8,000 for married couples filing jointly.
  • The total cannot exceed your Missouri adjusted gross income.
  • Contributions made by December 31st will qualify for a Missouri state tax deduction for that same tax year (no federal deduction).

Naming a Beneficiary

  • The accountholder can designate themselves as the “long-term care qualified beneficiary” or name someone else.
  • This must be finalized by April 15 of the year following the account’s funding.
  • Beneficiary designations are completed using Missouri Form 5872. This form, and a copy of the account’s Form 1099, must be provided when filing the Missouri tax return, annually.

Are there any investment restrictions?

No. In addition to receiving a deduction for contributions, all dividends, interest and capital gains for this account are excluded from Missouri taxable income—but are still included at the federal level.

How can the funds be used?

Funds can be used Missouri tax-free if distributed to a “qualified beneficiary,” which the state defines as someone meeting the federal definition of a “chronically ill individual” under 26 U.S.C. Section 7702B(c)(2). This includes individuals unable to perform two of the six “activities of daily living” (such as bathing, dressing, or eating).

What Happens if the Money is Used for Non-Qualified Expenses?

If withdrawals are made for non-qualified expenses, the amount will be added to the client’s Missouri taxable income. Additionally, a penalty of 5% or 10% may apply.

What Happens if the Money is Not Used Before the Account Owner Passes Away?

The remaining account balance will pass to the owner’s heirs, according to the terms of their TOD designation (either outright or in trust). The full value of the account is taxable by Missouri in the year of the owner’s death.

Are there any federal tax benefits?

No.  It is important to note that, for federal tax purposes, this account operates as a normal individual or joint investment account.

Who keeps track of all this?

Missouri requires the taxpayer to track contributions, claim the associated deductions and report withdrawals correctly. The account’s custodian has no responsibility.

For further information, Missouri provides answers to frequently asked questions on their website at: FAQs – Long Term Dignity Savings Account (mo.gov). Additional information can be obtained by referring directly to the Senate Bill No. 580: Long-term care savings accounts (mo.gov).