491 / Are benefits received under a qualified long-term care insurance contract taxable income?
No, they are not.
A qualified long-term care insurance contract is treated as an accident and health insurance contract. See Q 477. 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.1 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.2 See Q 343.
While there is no limit to the amount of benefits that may be received as reimbursement under a qualified LTC policy, this is not the case when benefits are paid as a "per diem" (i.e., without regard to the cost of services received). In the latter case, a calculation must be performed.
The taxpayer totals the sum of all per diem payments received during the year, including amounts received from QLTCI as well as accelerated death benefits received on account of "chronic illness" under IRC Section 101(g), but not including accelerated death benefits received on account of "terminal illness" under IRC Section 101(g).3
Next, $430 in 20264 is multiplied by the number of days in the period for which benefits were paid. The greater of this product or actual costs incurred is carried forward. Any reimbursements are then subtracted, and the result becomes the per diem limit, above which amounts received are taxable (Form 1040, line 21).
One frequently finds an oversimplified version of the above process, i.e., that the first $430 per day is excluded from income, with amounts over this threshold taxable to the extent they do not reimburse actual expenses incurred. This suggests that—as long as per diem payments serve to reimburse expenses—there is theoretically no taxable upper limit. But as Form 8853 makes clear, amounts under the $430 per day limit can be taxable. This occurs when reimbursements are received during the same period as per diem payments (uncommon, but possible for those who are covered by more than one policy). Since one's expenses have been reimbursed, the per diem policy is serving at this point as nothing more than pure income—and it is taxed as such (even if it is far below the $430 per day threshold).
1. IRC § 7702B(a).
2. IRC §§ 104(a)(3), 105(b).
3. Amounts paid as accelerated death benefits are fully excludable from income if the insured has been certified by a physician as "terminally ill" (having an illness or physical condition that can reasonably be expected to result in death within 24 months of the date of certification). Accelerated death benefits paid on behalf of individuals who are certified as "chronically ill" are excludable from income to the same extent they would be if paid under QLTCI.
4. IRC §§ 7702B(d)(4), 7702B(d)(5).