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.