LTC Surrender Income

[bpynn]

Question on how and what forms to treat Income from surrender of LTC policy for Other Income reported on Form 1099-MISC:
My questions are:
1. It is pretty clear that I report Surrender Income less total premiums ass Taxable Income under Miscellaneous Income.
2. Do I also use Itemized Deduction Recoveries: Medical deduction of LTC premiums on previous year(s) under the Tax Benefit Rule?

[AmyC]

Q1  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.

3. If Box 3 is marked "Per Diem" (which will happen for policies that are considered Indemnity policies) 

•  the amount you may exclude from taxable income being reported is limited.
• Because benefits were paid on a per diem (indemnity) basis, without regard to the actual long-term care expenses incurred; the amount of benefits that may be excluded from income is subject to a daily maximum amount.
• If this per diem (indemnity) limitation is exceeded, part of the benefits received may be taxable. The amount of the limitation increases every year. 

Q2. Long term care premiums are deductible as an itemized expenses each year.

See Publication 502, Medical and Dental Expenses, page 11 for full instructions on handling long term care and insurance. The whole pub is a quick read and well worth the time.

[bpynn]

Hi Amy thanks for the response.

I’m afraid I wasn’t perfectly clear that I received Form 1099-MISC NOT Form 1099-LTC so your response to question 2 are not helpful.

The 1099-MISC reports in Block 3 “Other Income” I received from SURRENDERING my LTC policy NOT a Distribution or benefits.

Form 8853 assumes I have Form 1099-LTC with per Diem or other periodic basis.

So, my original question 2 needs to be addressed with respect to the discussions in Pub 525, specifically;

Page 24  section”Recoveries”, “Tax benefit rule”  and,

Page 25 section  “Total recovery included in Income”.

Thank you

[DawnC · Accepted solution]

Yes, if you itemized deductions, and received a tax benefit, you will add it back as a recovery.  The refund is included in the beneficiary's gross income and is taxable, to the extent it was either excluded from the owner's income or deducted by the owner.  It must be included as income in the year it is received.
 

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.

Here is how to enter it in TurboTax:

Go to Wages & Income/Personal Income

Scroll to the last section, Less Common Income

Start next to last item, Miscellaneous Income

Start next to Reimbursed deductions from a prior year

Select Reimbursed Medical Expenses

Enter the amounts.  

Please see this community discussion & Best Answer regarding this type of income.    If you did not take a tax deduction for the after-tax premiums, and the surrender value is more than the premiums you paid, the difference is taxable as a long term capital gains.   If the surrender value is less than the premiums you paid, you have a nondeductible (personal) loss.