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

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.

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