Long-Term Care Insurance and Tax Planning
Are you armed with the best tax strategies?
by Daniel Finn/Journal of Accountancy
The number of baby boomers are currently, or fast approaching retirement age is rising, as is the demand for long-term care (LTC) insurance. Depending on the age of the insured, such coverage can be expensive, but fortunately, Congress and some states have provided income tax incentives for the purchase of certain LTC insurance policies — called "qualified" LTC contracts — in IRC § 7702B.
CPAs who have a command of these rules will be well-placed to provide valuable advice to clients. This article provides an overview of the income tax treatment for both premiums paid into and benefits received from qualified LTC insurance contracts for individuals (nongroup policies). As you'll see, benefits and premiums can be excluded or deducted from income — within limits — but the crucial question of who pays can make the difference ultimately whether that's true of any, some or all of the cost.
Taxation of Benefits
The federal income taxation of benefits received under an LTC policy depends on the type of contract. Under a "per-diem," (aka "indemnity-based") policy, the insurance company generally pays the same benefit regardless of the insured's actual LTC expenses. These amounts are received income-tax-free up to the greater of (1) costs incurred for LTC services or (2) a daily limit indexed for inflation — $270 per day in 2008. Any excess amount is taxed. (The taxable amount is further reduced by reimbursements received for LTC services, but with a per-diem policy, that reduction often will be zero). See IRC § 7702B(d) and Rev. Proc. 2007-66. Under a "reimbursement" policy, the insurer does not pay a set amount. Instead, it pays for LTC expenses incurred, up to the maximum benefit under the contract. All amounts received under a reimbursement policy are income-tax-free. See IRC §§ 7702B(a)(2) and 104(a)(3).
This has been excerpted from the Journal of Accountancy. View the full article here.