The refund of your long-term care insurance premiums would only be taxable if you included the premiums in the itemized deduction for medical expenses on your tax return for any year that you paid premiums.
If any one of the following three statements is true, none of the refund would be taxable, and you do not have to read any further.
- You always used the standard deduction on your federal tax return, and never claimed itemized deductions for any year that you paid long-term care insurance premiums.
- You claimed itemized deductions, but did not have any deduction for medical expenses for any year that you paid long-term care insurance premiums.
- You claimed itemized deductions, and you did have a deduction for medical expenses, but you did not include the long-term care insurance premiums in your medical expenses for any year that you paid long-term care insurance premiums.
If you did include the long-term care insurance premiums in your deductible medical expenses for any previous year, then the refund would be what is called an "itemized deduction recovery." You would have to report part or all of the refund as taxable income in the year that you receive it. You report only the amount that actually reduced your tax in the earlier year. The calculation of that amount is complicated, and TurboTax will not do it for you. (It could be affected by other things besides the amount of medical expenses you deducted.) You have to do the calculation yourself outside of TurboTax, and enter in TurboTax the taxable amount that you calculate. Adding to the complications, you have to do the calculation separately for each year that you included long-term care insurance premiums in the medical expenses on your tax return. If you had the policy for many years, and included the premiums in your medical expense deduction, this could be quite a lot of work. Also, you need a copy of your federal tax return for each past year that you included the premiums in your medical expense deduction.
You would have the option to report the full amount of the refunded premiums as taxable income, which would save you the trouble of doing the calculations. The IRS will not complain if you do that. But it's probably a significant amount, and there's a good chance that the full amount would not be taxable if you do the calculations.
The rules for calculating the taxable amount that you have to report are in IRS Publication 525, Taxable and Nontaxable Income, in the "Recoveries" section beginning on page 23 (in the 2020 edition).
Since your itemized deduction recovery is for medical expenses, don't forget to take into consideration the fact that your deduction for medical expenses was reduced by a percentage of your AGI. See Example 34 on page 25 in Publication 525.
After you calculate the taxable amount that you have to report as income, you enter it in TurboTax. You should be able to get to the right place by entering "reimbursed deductions" (without the quotes) in the Search box, then clicking the link that says "Jump to reimbursed deductions."
If your state allows a deduction for medical expenses, and you included the long-term care insurance premiums in the deduction on your state tax return in any previous year, you would have to check the rules regarding recoveries for your particular state.
If this is all too overwhelming, or you do not have the information from past years that is needed to calculate how much of the refund would be taxable, you may wish to consult a local tax professional for further guidance.
The information in this reply is specific to the facts given in the question, and might not apply to other situations.
