As part of ThinkAdvisor’s Special Report, 21 Days of Tax Planning Advice for 2014, throughout the month of March, we are partnering with our Summit Professional Networks sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format.
Are premiums paid for a qualified long-term care insurance contract deductible as medical expenses?
Amounts paid for any qualified long-term care insurance contract or for qualified long-term care services generally are included in the definition of medical care and, thus, are eligible for income tax deduction, subject to certain limitations. Amounts paid for the medical care of a taxpayer, the taxpayer’s spouse, or the taxpayer’s dependents are deductible subject to the 10 percent adjusted gross income floor. The 10 percent floor is effective for tax years beginning after 2012, but the 7.5 percent floor remains effective for senior citizens aged 65 and older (and their spouses) through 2016.
The deduction for eligible long-term care premiums that are paid during any taxable year for a qualified long-term care insurance contract as defined in IRC Section 7702B(b) is subject to an additional dollar amount limit that increases with the age of the insured individual. In 2014, for person’s age forty or less, the limit is $370. For ages forty-one through fifty, the limit is $700. For ages fifty-one through sixty, the limit is $1,400. For ages sixty-one through seventy, the limit is $3,720. For those over age seventy, the limit is $4,660. The age is the individual’s attained age before the close of the taxable year. The limits are indexed annually.
For tax years beginning after 2009, an annuity contract, life insurance policy, or long-term care insurance policy, may be exchanged for another qualified long-term care insurance contract without taxation.
An amount paid for qualified long-term care services as defined in IRC Section 7702B(c) will not be treated as paid for medical care if a service is provided by an individual’s spouse or a relative unless the service is provided by a licensed professional. A relative generally is any individual who can be considered a dependent under the IRC.
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. Since amounts received for personal injuries and sickness are generally not includable in gross income, benefits received under qualified long-term care insurance are generally not taxable.
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. If the insured is terminally ill when a payment is received, the payment is not taken into account for this purpose.
If payments exceed the greater of $330 per day (in 2014; $320 for 2013 and $310 for 2012, adjusted annually for inflation) or the actual amount of qualified long-term care expenses incurred, the excess payment amounts are taxable as income when benefits are paid. Notably, this “per diem” rule will not apply, regardless of payment size, if the payments are fully allocable to the reimbursement of the insured’s long-term care insurance expenses. However, payments in excess of reimbursements may become taxable to the extent they exceed the per diem limitation as calculated above.
For more tax stories and Tax Facts Q&A’s, check out ThinkAdvisor’s 21 Days of Tax Planning Advice for 2014 Special Report.