March 28, 2012

Tax Planning and Insurance, Pt. 1: Tax Treatment of LTC Benefits

Be aware of the limit on the amount of qualified LTC benefits that may be excluded from income.

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As part of AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012, throughout the month of March 2012, we are partnering with our Summit Business Media sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format. In this, the sixth article, we look at the tax treatment of Section 83 funded deferred comp agreement.

Are benefits received under a qualified long-term care insurance contract taxable income?

A qualified long-term care insurance contract is treated as an accident and health insurance contract. Thus, amounts (other than dividends or premium refunds) received under such a contract are treated as amounts received for personal injuries and sickness and are treated as reimbursement for expenses actually incurred for medical care.Amounts received for personal injuries and sickness are generally not includable in gross income.

But there is a limit on the amount of qualified long-term care benefits that may be excluded from income. Generally, if the total periodic payments received under all qualified long-term care insurance contracts and any periodic payments received as an accelerated death benefit under IRC Section 101(g) exceed a per diem limitation, the excess must be included in income (without regard to IRC Section 72). If the insured is terminally ill when a payment treated under IRC Section 101(g) is received, the payment is not taken into account for this purpose. 

The per diem limitation is equal to the excess of the greater of (1) a $310 per day limitation in 2012 ($300 for 2011 and $290 for 2010); or (2) the actual costs incurred for qualified long-term care services provided for the insured over any payments received as reimbursement for qualified long-term care services for the insured. This figure is adjusted for inflation annually. 

Example. In 2011, Mr. Heller receives qualified long-term care services for 30 days at a total cost of $7,500. A qualified long-term care insurance contract pays him a benefit of $300 per day, $9,000 total. In addition, $500 of the cost of the qualified long-term care services are reimbursed by another source. Thus, $0 of the $9,000 benefit is includable in income by Mr. Heller.

 

Per-diem limitation equal to greater of:

 

(1) $300 per day for 30 days

$9,000

 

(2) $7,500 in actual expenses less $500 reimbursement

$7,000

 

 

 

Amount includable in income:

 

Per-diem benefits under qualified LTC insurance contract

$9,000

 

Less per-diem limitation

$9,000

 

Includable amount

$0

     

 

See all six articles from Tax Facts Online, part of AdvisorOne's 22 Days of Tax Planning for 2012 Special Report.

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