Long Term Care provider sent 1099-MISC after stopping the policy

[Anonymous]

Hello,  we got a letter from our long term care provider saying that we could either pay more per month or end the policy and they would pay us a certain amount of money.  We chose to end the policy and received the money from the company.  They issued us a 1099-MISC form for that amount.  Do we have to pay taxes on that amount even though we have paid monthly premiums for 20 years?

Thanks

[ErnieS0]

It depends. The IRS says: "Any refund given upon cancellation or complete surrender of the policy will be includable in income to the extent that any deduction or exclusion was allowable with respect to the premiums."

See Treatment of qualified long-term care insurance

Tax Champ @MichaelL1 explains "If you took a deduction for your long term care premiums as a medical expense in previous years (Schedule A itemized deductions), you need to report it as a "reimbursed deduction from a prior year". If you did not take the deduction, it is not taxable income."

See the full discussion at If I received a 1099-LTC form for refunded premiums for a surrendered long-term care policy, is the ...

[Anonymous]

For federal taxes: So, given that we paid all of our premiums with after tax dollars, had no claims,  and no deductions ever, we should not pay taxes on any money paid back to us to close the policy less than or equal to the total premiums paid...correct?

For state of Minnesota taxes: Minnesota gave us a max of $200 deduction per year which is significantly lower that the premiums we paid.  So, given that the total of the money paid back to us to close the policy was much less than the total premiums paid, we should not have to pay state taxes either on this money...correct?

Thanks

[ErnieS0 · Accepted solution]

Correct. If your policy costs were higher than what you received upon cancellation then the amount is not taxable. 

You should report the 1099-MISC on your tax return, The IRS does not know how much you paid in premiums and will assume you did not report it.

You can enter it as Other Reportable Income and on the next line include a negative for same amount (you can't claim a loss) for premiums paid. Reference the 1099 in your description, such as Long-term care account distributions (Form 1099-MISC)

• In TurboTax Online click on Federal on the left column
• Click on Wages & Income at the top
• Scroll down to Miscellaneous Income, 1099-A, 1099-C. Start
• Choose Other reportable income
• Say Yes to Any Other Taxable Income?
• In Other Taxable Income, enter a Description and Amount