When is long term care insurance reimbursement considered income?

[MichaelDC]

Generally, your LTC reimbursement is only taxable if they exceed your medical expenses. Be sure to answer the TurboTax follow-up questions in the 1099-LTC interview. It may be best to answer having read the below info first.

If you have additional questions or details regarding this, please feel free to post in the comments for further clarification.

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. 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.

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. If the insured is terminally ill when a payment is received, the payment is not taken into account for this purpose.

If payments exceed the greater of $360 per day (adjusted annually for inflation) or the actual amount of qualified long-term care expenses incurred, the excess payment amounts are taxable as income when benefits are paid. Notably, this “per diem” rule will not apply, regardless of payment size, if the payments are fully allocable to the reimbursement of the insured’s long-term care insurance expenses. However, payments in excess of reimbursements may become taxable to the extent they exceed the per diem limitation as calculated above.

[LMSCPA]

Another question related to this.  If a taxpayer receives a settlement for "cash payment in lieu of continuing a ltc insurance policy, is any of the amount received taxable?  More info - they received a form 1099-LTC with amount received in box 1 ($35625.32) and box 3 is checked as "reimbursed amount".  And they received a letter also providing them with the amount of total premiums paid $34245.26 and total claim benefits received $0.  is the full amount of $35625.32 taxable or only the difference of amount received and premiums paid (35625.32-34245.26=1380.06)?

[jonbcole]

If a taxpayer receives a settlement for "cash payment in lieu of continuing a ltc insurance policy, is any of the amount received taxable? More info - they received a form 1099-LTC with amount received in box 1 ($35625.32) and box 3 is checked as "reimbursed amount". And they received a letter also providing them with the amount of total premiums paid $34245.26 and total claim benefits received $0. is the full amount of $35625.32 taxable or only the difference of amount received and premiums paid (35625.32-34245.26=1380.06)?

[NCperson]

just the difference.... the rest is return of premium, which you paid to them originally with after-tax dollars 

I suspect the $1300 is interest on that money which you have to pay taxes on , 

[missytax29]

Same as the question above, however, the taxpayer has not established/transferred the funds into another LTC account.  Can the basis still be subtracted?

[JotikaT2]

It depends.

If the amount reimbursed exceeds the total amount of medical expenses paid, then the excess would be taxable income regardless of whether they are transferred into another long term care insurance policy.

Long Term Care instructions from IRS

[vista25]

During COVID, for safety reasons my parents no longer used an outside care provider for home health care.  Their LTC company had been paying the care provider directly, with no taxable impact for my married jointly filing parents.  Now that my mom is the provider and the LTC is paying my dad a "reimbursement" for hiring my mom, I assume that my mom will report this as wage income, including having to pay social security and medicare tax.  Does my dad need to issue a W2 or 1099 to my mom?  Is it OK to just report this as income on the tax return without going to the effort of issuing a W2 or a 1099?  I assume this "reimbursement" is taxable as they are essentially paying themselves.  They are quite elderly and are hoping for a simple solution.

[nat13]

I received qualified long term reimbursements for a long term illness. I know that the proceeds are not considered taxable income. Are the reimbusements an offset for the amounts I paid agencies for my LTC? E.g Paid $40,000 personally and received $25,000 in qualified reimbursements.

When itemizing expense do I need to enter the amount I paid less the reimbursement? Or in this example $15,000

[AnnetteB6]

Yes, when entering your medical expenses you would only enter the amount that you paid over and above the reimbursed amount ($15,000 for your example).  

Or, enter the full amount ($40,000) and also the reimbursement ($25,000).  The end result is the same either way.  

@nat13

[dehn0007]

This was my question as well but it is not so simple. LTC benefits are reported from form 1099-LTC in the miscellaneous income section. TT then asks what the total reimbursed expenses were and calculates what amount is taxable. 

Later you come to the deduction and credit section and it asks you what medical costs you had. There are categories for Long Term Care and for  Medical Facilities. Is an assisted living unit LTC or a medical facility? Can I deduct everything not reimbursed for my Dad with dementia? There is very little guidance here and the unreimbursed amount is close to my Dad's gross income! This makes a huge difference but I can't find any answers that take all of the pieces into consideration. 

[154j]

Good information, but could use some additional information in the context of receiving LTC payments under a per diem policy when the receipts are less than the $360 per day limitation.  My per diem policy does NOT actually require that I incur any costs.  I finally got everything entered last year, but once again cannot find how to address this on Turbotax.  Anyone have any observations?  

[Cynthiad66]

ou'll receive Form 1099-LTC if you got money from long-term insurance or life insurance under an accelerated death benefits clause.

Here's how to enter your 1099-LTC into TurboTax:

1. Open (continue) your return if it's not already open.
2. Search for this exact phrase (copy/paste strongly recommended): 1099-ltc, long-term care - distribution and select the Jump to link.
3. On the Any Long-Term Care Contracts? screen, answer Yes to the first question (and Yes to the second question if it applies, otherwise No) and select Continue.
4. Follow the instructions. If you need Form 1099-LTC we'll fill it out for you.

Note: In TurboTax Online Free Edition, you'll be prompted to upgrade to Deluxe.

Depending on which boxes of the 1099-LTC are checked, when you work through the interview you are asked to enter information for the items that may be taxable. Box 4 may be checked to indicate the benefits were from a qualified long-term care contract. Answers to the narrative questions will determine if the amounts are taxable or non-taxable. The insurance carrier may also provide information on the policy benefits.

The 1099-LTC does  need to be entered, in TurboTax, even  if you know it is not taxable.  TurboTax (TT) will prepare for 8853 to calculate the taxable portion (even if 0).

In TurboTax (TT)

[Joseph381]

I received a $9300. payment to modify me bathroom to make it wheelchair accessible. Total cost of modification was $25000.00. Is this payment taxable income?

[MarilynG1]

@Joseph381 No, the payment you received to modify your bathroom is not taxable income.

In the Medical Expenses section, you could enter Expenses of $25,000 and Reimbursement of $9300, leaving you with Medical Expenses to claim of $15,700.

Be sure to keep receipts to prove the cost of $25,000. 

Click this link for more info on Claiming Handicapped Modification Expenses.