Is cash for surrender of Long-term care policy taxable?

[Critter]

Possibly ... any amount above the contributions made probably are but ask the insurance company for the information that will be reported on the form 1099. 

[daz2016tax]

So if I received a cash payment of less than my total premiums paid, no tax is due? 

Do I have to report on my Federal tax return?

[garbobdg71]

Are capital gains applicable to difference between premiums payed and buyout amount on long-term care insurance?

[MarilynG1]

@garbobdg71 The difference between premiums paid and insurance cash-out amount could be reported in the 'Other Income' section, if you did not receive a 1099-INT or 1099-R to report the income.

Click this link for more info on Insurance Policy Cash Surrender. 

[4Estate4]

Thinking about surrendering Long Term Care Policy.

Cash payout : $99,300

Premium Paid: $32,751.50.

What is my tax exposure for this Insurance policy?

What will the 1099 Misc. look like ?

[Cynthiad66]

You won't be taxed on the entire surrender value, though. You'll be taxed on the amount you received minus the policy basis, or the total premium payment you made on the policy. The difference between the total premiums paid and the total surrender value will be taxable income.  You will receive a form 1099 from your handling agency which will provide guidelines on how to report the income.

This wil be reported as other income on your tax return.

The cash value generally grows tax-deferred. If you surrender the policy or access cash value through a policy loan, those distributions may be taxable and could reduce or eliminate coverage, including the policy's long-term care benefits.

[OldMan2]

In 2023 I accepted my LTC carrier's offer of surrender of the policy for an amount in excess of the total of premiums paid. The only person I've been able to speak with at the carrier (a clerk) tells me that I will receive no 1099 because this is a "tax qualified plan." My research tells me that "tax qualified" refers to BENEFITS paid, not a cash surrender in excess of premium paid.

So I conclude that the amount received in excess of the premium paid is taxable. (Do you agree?) Can I treat this as a capital gain?

Thanks for your help.

[Mike9241]

You'll be taxed on the amount you received minus the policy basis, or the total premium payment you made on the policy. The difference between the total premiums paid and the total surrender value will be taxable income.  You will receive a form 1099 from your handling agency which will provide guidelines on how to report the income.

It's ordinary income, not capital gain. while some states exempt retirement distributions, this probably won't qualify in those states.

[newtoTT1]

My insurance co. will not be issuing a 1099 for the surrender policy.  I need to fill one out myself which seems odd

[newtoTT1]

since the policy is tax qualified there will be no 1099 from my Insurance company.

How do I fill out the 1099?  what amount do I use for the bock 1. The total surrender value or the total mine the premiums paid?

[DaveF1006]

You would enter the gain from the policy as taxable income.  The gain is the amount of the surrender minus the premiums paid. Here is how to enter.

1. Log into your account
2. Select Wages and income>other income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed. 
7. You would list this as "Gain From Surrender of a Life Insurance policy" and then the amount of interest paid (gain) over and above your premiums paid.

[newtoTT1]

Found this on the web. Is it saying there is no tax on this surrender value?

• LTC NEWS has designed this guide on the tax advantages of Long-Term Care Insurance. Generally, no. Tax-qualified Long-Term Care Insurance benefits come to you tax-free. Insurance companies that pay long-term care insurance benefits are required by the Internal Revenue Service (IRS) to provide claimants with a 1099 LTC.
• thanks for you assistance

[Waddie01]

If the gain is negative (i.e.) a loss than you take it as a long term loss. In my case the loss was ~-$20K and my wife had a $2K gain. Thanks for helping me input this into TT. The insurance company sent us a 1099-MISC which I'm sure will complicate things with the IRS. Any advice on that?

[LindaS5247]

@Waddie01 Please clarify your question by adding some additional information so we can provide a more helpful answer.  Did you receive a Form 1099-LTC and a 1099-MISC or just a 1099-MISC?  What information was on your Form 1099-MISC? What box is the income in? What type of policy did you have?

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