Most major Democratic presidential hopefuls have proposed new government assistance for those receiving long-term supports and services and their families. Mayor Pete Buttigieg has proposed public catastrophic long-term care insurance. Senators Elizabeth Warren and Bernie Sanders would make home-based care a Medicare for All benefit. And former vice president Joe Biden and Sen. Amy Klobuchar would create new tax credits for long-term care.

But tax credits may not be the most effective way for government to provide this support. They can be difficult to administer and, as designed, likely these would benefit relatively few of those who most need assistance.

Going two better

Biden’s plan includes a $5,000 non-refundable tax credit for family caregivers. It tracks an AARP proposal to give caregivers a credit for up to 30 percent of documented long-term care expenses above $2,000. The credit would begin to phase out for couples with income of $150,000 or for singles who make $75,000. A bipartisan bill in Congress called the Credit for Caring Act is based on this idea.

Amy Klobuchar goes Biden one better. Well, two better.

She’s proposing a broad package of long-term care reforms, including three new tax benefits:

  • A new 20 percent tax credit to partially offset premium costs of qualified long-term care insurance.
  • A $6,000 tax credit to reimburse family caregiving expenses.
  • A separate (unspecified) refundable tax credit for those receiving care to help offset qualifying long-term care costs, such as nursing facility care, home care,  assistive technologies, respite care, and home modifications.

Refundable and non-refundable credits

It is important to distinguish between refundable and non-refundable tax credits. Non-refundable credits offset income tax liability and thus can be claimed only by those who pay federal income taxes. Refundable credits not only reduce tax liability for those who owe taxes, but also provide a direct government payment to those whose tax liability is lower than the credit amount and even to those who owe no federal income tax at all.

The Tax Policy Center estimates that in 2018 about 44 percent of US households paid no federal income tax (though they paid other taxes, such as payroll or sales taxes). And a separate analysis finds about 80 percent of those 75 and older owed no federal income tax. A non-refundable credit would be worthless to those who pay no federal income tax and provide only a limited benefit to those whose tax liability is small.

As a result, relatively few families would benefit from Biden’s and Klobuchar’s non-refundable caregiver credits.

Would they be meaningful?

Klobuchar’s refundable credit for long-term care recipients would benefit more low-income older adults. But would a few thousand dollars be meaningful to someone whose annual cost of care could easily approach $100,000? For example, an annual $5,000 credit might pay for four or five hours a week of home care, or about two weeks in a nursing home. Not nothing. But not a lot.

Credits to subsidize the cost of long-term care insurance raise similar questions. A 60-year old woman who buys a good long-term care insurance policy can expect to pay roughly $4,000 in annual premiums. A 20 percent credit would save $800, lowering her after-tax cost to $3,200. But would many more people buy at that price?

Then there is matter of administering these tax breaks. Caregiver credits inevitably will come with a long list of complex rules and definitions. Who is a qualifying caregiver? How impaired does a care recipient need to be? What services and supports are eligible for the credit?

Who would be eligible?

Buttigieg’s public long-term care insurance plan also raises questions of when an insurance benefit is triggered. But claims could be managed through a public insurance program staff or outsourced to experienced private claims managers. With tax credits, the job of determining eligibility would fall to an already understaffed IRS with no experience in these matters.

The Credit for Caring Act generally tracks the eligibility rules for the tax deductibility of private long-term care insurance policies. (premiums already are eligible for the medical expense deduction—up to an age-based annual limit) For example, it would require a health professional to certify that a person needs assistance with at least two activities of daily living (such as bathing, eating, or toileting) to qualify.

But how would the IRS administer these rules? How would it prevent fraud and how would families know when they are eligible?

I’m also concerned about the sheer number of tax credits Klobuchar is proposing. Three separate credits with three separate sets of rules will confuse families and lead to mistakes, and may even discourage people from claiming benefits. Given multiple options, people often do…nothing. This has been an ongoing problem with the many tax subsidies for higher education.

Biden and Klobuchar deserve kudos for addressing the problem of long-term care. But tax credits may not be the best way to solve it.