Don't forget about your insurance deductions on your federal tax return

Emmet Pierce for InsWeb.com writes:   No one looks forward to paying federal taxes, but Tax Day – April 15 – could be a little less painful if you remember to use IRS insurance deductions.
Bob Meighan, vice president of customer advocacy for tax preparation software company TurboTax, says a variety of insurance tax breaks are available for businesses and individuals who itemize their deductions.
Homeowners whose home loan companies require them to buy mortgage insurance can deduct their full premiums for 2012 from federal taxes, he says. Lenders require mortgage insurance to protect their interests.
This insurance protects the lender’s investment, if for some reason you can’t pay your mortgage, he says. “You can claim the full amount,” Meighan says. “Many people may overlook it.”
Small businesses can deduct any insurance premium that is a legitimate business expense, Meighan says. They can deduct any cost that is insurance-related, from business-interruption insurance to malpractice coverage.
“If cars are used in the business, like a delivery truck, the premiums you have to pay for those are deductible as well,” says Lindsey Buchholz, lead analyst for H&R Block, a tax preparation company.
Tax breaks for storm victims
If you were one of thousands of Americans who suffered losses during the storms and floods of 2012, there’s a good chance that you can write off your business or homeowner’s insurance deductible. This is the amount you had to pay out of pocket before your insurance kicked in, Meighan says.
The home repair expenses you incurred that weren’t covered by your insurance also may be deductible, he says. The first $100 of out-of-pocket expenses must be borne by you, however. For example, if your home was in the path of Superstorm Sandy and you had a $5,000 homeowner’s insurance deductible, you can declare a tax write-off of $4,900.
The same basic rule applies for 2012 auto claims, he says. If you sustained damage to your car but had to pay a car insurance deductible of $1,000, you can write off $900 of that amount, if you itemize your deductions.
It's difficult to find tax breaks based on life insurance expenses, says Marvin Feldman, president and CEO of the nonprofit Life and Health Insurance Foundation for Education. For individuals, life insurance typically is not a tax-deductible item.
An exception is when businesses take out life policies on key employees whose functions are considered essential to the business’ well-being, Meighan says. In such cases, the cost of a policy typically can be written off as a business expense.
Feldman says taxpayers have strong financial incentives to buy cash-value life insurance, a policy whose value grows over time, since it can function as a temporary tax shelter.
A cash-value policy pays out to beneficiaries when the policyholder dies, but it also lets the policyholder accumulate the cash for use during his or her own life. The interest and earnings can’t be taxed.
You can borrow against the cash value that has been accumulated in a life policy. However, if you surrender the policy for its full value, the money you receive may be taxed, Feldman says. Typically, you’d have to pay taxes on the “gain” when the policy is surrendered. To calculate the gain, subtract the amount you have paid in premiums from the balance you receive when the policy is surrendered.
In an effort to raise revenue and help balance the federal budget, some members of Congress have proposed ending the cash-value policy tax deduction, according to Feldman.
“The insurance industry is lobbying very hard to make sure the cash-value life insurance policies remain untaxed,” he says.
Health and long-term care insurance
If businesses provide health insurance for their employees, they can take a deduction for the premiums, Buchholz says. For individuals who itemize their returns, health insurance payments generally are allowed as medical deductions. However, their total medical expenses must exceed 7.5 percent of their adjusted gross income (also known as AGI, which is the total gross income minus specific reductions) in order to earn a tax break, says Barbara Weltman, author of “J.K. Lasser’s 1001 Deductions and Tax Breaks 2013.”
It’s tough to reach the 7.5 percent AGI threshold, and it’s about to get even harder. When Tax Day 2014 arrives, it’ll jump to 10 percent. “The only people who can continue to use the old rate are people who are 65 or older at the end of the year. Starting in 2017, everybody has to use 10 percent,” Weltman says.
Long-term care insurance policies generally are considered medical expenses for tax purposes, says Jack Lenenberg, a long-term care insurance specialist in Georgia. They can be used to help people reach the AGI threshold.
The amount individuals may deduct from their taxes for long-term care insurance rises as they age. In 2013, people 40 and younger can deduct up to $350 in premiums as medical expenses. Taxpayers who are 70 or older can deduct up to $4,370 for premiums. More information is available from the American Association for Long-Term Care Insurance.