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Tax Planning/Longterm care benefits taxable?


My husband & I are considering buying longterm care insurance from a company that says it is unusual -- it provides a cash payout of the monthly benefit, rather than a reimbursement of bills or a payment to providers, once the need for longterm care has been established. So you would receive $6,000 a month once you start receiving care, whatever the level of care you need. The brochure for this plan notes that you should check on possible tax ramifications. So we are concerned that there might be tax repercussions from receiving the benefit as a direct payout rather than as a reimbursement. For instance, if we don't yet require assisted living but are receiving $500/month worth of Home Health Care, would we be taxed on the other $5,500?
Thanks very much for your time!

Beth -

The answer, as in most tax questions, is complex.

I'm assuming from your question that the payments are "fixed" and not based on actual care costs.   If they are the other, then they would not be taxable unless the benefit was over about $70K for the year.

Also, if the person is chronically ill, then they probably are not taxable.  If it covers a short-term than the excess may be taxable.  

See the following examples from Prudential:

Fixed Periodic (or “Per Diem”) Payments
Qualified Long Term Care insurance contracts which provide benefits on a “per diem” basis, that is, the provision of a predetermined specified amount of dollars on a periodic basis, regardless of how much the long-term care provider(s) charges for its services, are treated differently for tax purposes than indemnity policies.

The tax free receipt of per diem benefits is limited, so that policyholders will be taxed on the amount of benefits which exceeds:
• The greater of $190 per day (for 2000) ($69,350 annually; indexed by inflation)
• The amount of qualified long term care expenses incurred by the insured

Only benefits paid under a policy specifically to reimburse actual expenses are not subject to the cap. Payments made on a cyclical or even lump-sum basis will be considered periodic payments subject to the cap. If the periodic payments exceed the cap, the benefit amounts in excess of the cap will be included in income.

An insured receives $200 per day in benefits. In 2000, only $190 is excludable from income. However, if the employee can show that $200 of expenses were actually incurred, then the entire amount received may be excludable.

A policy pays an insured $5,000 for a 20-day period of chronic illness. The actual expenses were $3,800 or less, ($190 x 20). The insured will have $1,200 of taxable income.

As a tax strategy, we would wait to see what the insurance company would issue in the form of a 1099 and then look for every possible strategy to find expenses that would qualify to offset the taxable portion of the benefits received.

As I said, the answer is complicated.

I hope this helps.

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