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| Kersten and Associates 900 Fort Street Mall, Suite 400, Honolulu Hawaii 96813 Phone (808)531-3137 Fax (808)261-2626 kerstenandassociates@live.com |
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The benefits an individual receives from a qualified long term care insurance (LTC) policy are not includible in taxable income when they are reimbursements for actual expenses incurred for qualified long term care services. Maximum deductions for qualified long term care insurance premiums are set under Internal Revenue Code Section 213(d)(10).
Note: only medical expenses in excess of 7.5 percent of adjusted gross income are deductible.
Maximum Deductions for Qualified Long Term Care Insurance Premiums Under Code Section 213(d)(10)
Attained Age Before Close of Year |
2009 |
40 or Less |
$320 |
More Than 40 But No More Than 50 |
$600 |
More Than 50 But No More Than 60 |
$1,190 |
More Than 60 But No More Than 70 |
$3,180 |
More Than 70 |
$3,980 |
Amounts received under a Qualified Long Term Care policy are treated as amounts received for personal injuries and sickness and are treated as reimbursement for expenses incurred for medical care as defined in Internal Revenue Code § 213(d).¹ All reimbursement amounts from an expense reimbursement policy are excluded from the recipient's gross income.² This is the tax result for reimbursement-type policies regardless of who makes the premium payment and whether the insured individual is an Employee or Self-Employed Owner.
With an Indemnity or per diem policy, however, only benefits up to a daily limitation are excludable from gross income. The daily limitation for any period is the greater of a prescribed dollar amount which is inflation-adjusted ($280 per day for 2009) or the actual costs incurred for qualified long term care services provided for the individual during such period, reduced by any reimbursements received for these services during such period.³ This is the tax result for Indemnity/per diem type policies regardless of who makes the premium payment and whether the insured individual is an Employee or Self-Employed Owner. Examples 9 and 10 illustrate the tax consequences of an Indemnity/per diem policy.4
Example 9. In 2009, Chad is chronically ill for 12 months and receives 12 monthly payments on a per diem basis from a QLTCIC. He is paid $3,000 per month ($36,000 total). Chad's actual cost for qualified long-term care services is $100 per day ($36,500). In addition, he receives reimbursement under another policy of $10,000. The per diem limit is the greater of the prescribed dollar amount for 2009 multiplied by the number of days in the period ($280 x 365, or $102,200) or the actual cost incurred for the period ($36,500), less any reimbursed amounts. Thus, Chad's per diem limitation is $92,200 ($102,200 - $10,000). Chad's per diem benefit of $36,000 was less than the $92,200 per diem limitation. Therefore, the entire $36,000 benefit is excludable from Chad's gross income.
Example 10. Assuming the same facts as in Example 9, except that Chad receives a $280 per diem benefit for 365 days, or $102,200 ($280 x 365) total in qualified long term care per diem benefits; his actual cost of qualified long-term care services is $210 per day ($76,650), and he received no other reimbursement of these expenses. Chad's per diem limitation is $102,200 ($102,200 - $0); therefore, he would have $25,550 ($102,200 - $76,500) in non-excludable income.
However. The additional non-taxable $18,500 he receives over actual expenses under his per diem contract (indemnity type plan) can be used for medications, home improvements and/or personal services not covered under the contract.
If a refund is generated by a Return of Premium provision, it is included in the beneficiary's gross income and is taxable to the extent it was either excluded from the owner's income or deducted by the owner. It must be included in income the year it is received.
Tax qualified LTCI premiums can be reimbursed through a Health Savings Account (HSA), tax-free- up to the Eligible Premium (above), even if the HSA if offered through an employer-provided cafeteria plan. However, tax-qualified LTCI policies cannot be purchased with pre-tax dollars under and employer-provided Cafeteria Plan. Also, these premiums cannot be reimbursed under a Flexible Spending Account(FSA).
¹ I.R.C. § 7702B(a)(2).
² For personally paid insurance, I.R.C. § 104(a)(3) applies, and for employer-paid insurance, I.R.C. §§ 105(a) and (b) apply
³ I.R.C. §§ 7702B(d); Rev. Proc. 99-42, Sec. 3.27, 1999-46 I.R.B.
