Is Form 8853 providing a reasonable and correct answer?

[docsock]

I spent $77,733 on LTC for my wife and received total reimbursement amounts of $102,399 from two LTC insurance policies. It would seem to me that the excess of $24,666 should be the amount on which I should pay additional income tax.

In completing IRS Form 8853, I had to struggle to get around (i.e., ignore) the fact that the combined amount received from the insurance company was NOT "per diem or other periodic basis." Using one LTC period of 365 days, the result from IRS Form 8853 on line 26 was that I owe taxes on $55,148. How can this be? Is there an alternative method for declaring the additional income of $24,666?

[AmyC]

If box 3 is not per diem, then reimbursed amount is expected. You do not say if tax qualified or not.  A distribution is reported on Form 8853 Long-Term Care Insurance Contracts. Page 2 calculates any taxable portion.

 You may not  have any taxable income for the LTC depending on the situation.

1. If Box 3 is marked "Reimbursed Amount" and the policy is categorized as a Tax-Qualified Contract,

•  the amount of money received can generally be excluded from the income being reported. The insurance company can tell you if your policy is considered a Tax-Qualified policy.
• A tax-qualified long term care insurance contract qualifies for favorable federal income tax treatment. If the policy only pays benefits that reimburse you for qualified long-term care expenses you will not owe federal income tax on these benefits.

2. If Box 3 is marked "Reimbursed Amount" and you have a Non-Tax Qualified Contract, 

•  some or all of your benefits may be taxable. Again, the insurance company can tell you if your policy is considered a Non-Tax Qualified policy.
• A Non-Tax Qualified policy may result in a tax liability. Today, most long-term care policies are tax-qualified.

[docsock]

My problematic situation arose because I was using two LTC policies to pay for my wife's care, one for her solely and the other jointly for the two of us.  As "encouraged" by the insurance company customer service representatives, I initially made claims on both policies using the same invoices, but soon afterward felt as if I were double-dipping.  After a while, I stopped making the double claims and instead alternated between policies  for reimbursements.  However, the double payments continued, and it took some time for the have payments to be made on each policy only when I requested it.

Boxes 3 and 4 on both 1099-LTCs indicate that the payments were reimbursements on  qualified contracts.  In responding to the TurboTax directions as well as the IRS instructions for Form 8853, I understood the definition of "per diem" in this context, but had no idea how to interpret "or other periodic basis."  Was the meaning analogous to "diem," but using an extended united of time such as weekly, monthly, or annually?

 Or, could it have meant something other than "per diem," such as reimbursement, a word to which I saw virtually no references in either the TurboTax or IRS instructions.  Nevertheless, it struck me that "per diem" was so strongly emphasized that the user's  situation was either per diem (and we'll guide you through) or you're on your own.

In order for me to answer TurboTax questions referring to page 2 of IRS Form 8853 with this newfound knowledge, assuming no accelerated death benefits, the answers to questions 17 through 20 should all be zero ($0) if the payments are reimbursements.  In going further onto questions 21 through 25, because $410 multiplied by the number of days in the LTC period is larger than the actual expenses in many or most cases, the concepts behind the calculations here are more relevant to per diem payments, and the actual expenses become irrelevant.  Thus, taxable payments of line 26, is irrelevant for most reimbursed payments.  And that's the reason I could never have it come out to something reasonable, such as the difference between expenses and reimbursements, if I were to actually have to pay taxes on it.

Thank you for your guidance, Amy C.  It was most helpful. I apologize for the length of this response.

My only remaining problem now is to figure out how to wipe out the answers I had previously given to TurboTax and to start again in this section.

[docsock · Accepted solution]

Following AmyC's excellent advice with a little reasoning, the problem was completely solved.  The solution was to delete all previous responses to the Form 8853 interview and to follow this with redoing that interview with a new set of more appropriate responses. TurboTax not "forgetting" what had been mistaken answers was the cause of my very significant increase in federal and state taxes. 

As advised in previous questions about deletions on this site, using the Forms tab, I went to Form 8853, p2 and Schedule 1, line 8e and was able to blank out all previous responses.  Then, with neither accelerated death benefits nor per diem (or analogous "other periodic basis") payments, I answered line 17 with a 0 (zero) and left the answers to lines 18 - 20 blank.  The correct information for lines 21 -24 mattered not at all, other than to fill space, as did the resulting line 25, because TurboTax wisely left line 26 blank and consequently Schedule 1, line 8e blank.  Hurrah.  No additional income.

I think all of these problems could have been avoided if the IRS had created separate sets of Form 8853, p. 2 questions for per diem payments and for reimbursed payments.