How Are Long-Term Care Insurance Benefits Taxed?

Shawn Plummer

CEO, The Annuity Expert

In the vast world of insurance, taxes, and financial planning, long-term care insurance stands as a unique guardian, preparing us for the unanticipated demands of life’s later stages. But understanding the question “Long-Term Care Insurance Benefits Taxed?” is crucial and challenging. Fear not, dear reader! This blog aims to provide clarity, not confusion. By decoding the tax laws related to long-term care insurance benefits; we aim to put you back in the driver’s seat of your financial future. So let’s unravel the mystery together.

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Are Benefits From Long-Term Care Insurance Taxable?

Yes and no. Like many things in tax law, the answer depends on several factors. The Internal Revenue Service (IRS) generally treats long-term care insurance benefits as tax-free. However, this is subject to certain conditions and limits. If your received benefits exceed a specific limit or your insurance policy doesn’t qualify under IRS guidelines, you could pay taxes on some or all benefits.

For instance, imagine you have a policy that qualifies but received benefits exceeding the per diem limit in 2023. In that case, the IRS would consider the excess taxable income.

How Are Long-Term Care Insurance Benefits Taxed

How Are Long-Term Care Insurance Benefits Taxed?

The taxation of long-term care insurance benefits hinges on the nature of the policy – whether it’s a “per diem” or “reimbursement” policy – and the amount of benefits received.

Under a per diem policy, you receive a fixed daily amount. The surplus is taxable; however, if your benefits exceed the IRS-approved limit for the year (in 2021, it was $400).

Reimbursement policies cover the actual cost of your long-term care. If your benefits don’t surpass your qualified long-term care expenses, they’re usually tax-free.

Consider Bob, who has a per diem policy and receives benefits surpassing the IRS limit. However, the excess amount is considered taxable income, whereas, under his wife’s reimbursement policy, all benefits are tax-free as they directly pay her long-term care costs.

Are Long Term Care Benefits Taxable

Are 1099 LTC Benefits Taxable?

The 1099-LTC is the form insurers use to report the benefits you receive from a long-term care policy. Not all 1099-LTC benefits are taxable. The benefits you receive are tax-free up to a certain amount. However, if they exceed the IRS-approved limit, the excess becomes taxable.

Consider Alice, who receives a 1099-LTC indicating she received benefits worth $50,000 a year. If her qualified long-term care expenses were $45,000, then $5,000 would be taxable.

When Are Long-Term Care Benefits Taxable?

Long-term care benefits become taxable when they exceed the annual IRS-approved limit or when the policy doesn’t meet specific criteria laid out by the IRS. Therefore, consulting with a tax advisor or financial professional is essential to understand your unique situation.

How Are Long-Term Care Benefits Taxed

How Can LTC Benefits Be Received Tax-Free By An Individual?

Long-term care benefits can be received tax-free under two primary conditions. First, the insurance policy must be a “qualified” long-term care contract per IRS rules. Second, the benefits received must not exceed the IRS’s approved per diem limit or your actual long-term care expenses in the case of reimbursement policies.

Here’s a quick example: Jim holds a qualifying policy and receives benefits up to the IRS limit. So he can enjoy his benefits tax-free.

Next Steps

As you can see, the tax implications of long-term care insurance are not as daunting as they might seem at first. While it’s true that some benefits may be taxable, a carefully structured policy adhering to IRS guidelines can provide tax-free support when you need it most. Review your policy and consult a tax professional to navigate these waters confidently. After all, planning for the future means understanding today. And rest assured, you’re now better equipped to understand the ins and outs of the taxation of your long-term care insurance benefits.

How Are Ltc Benefits Taxed

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Frequently Asked Questions

Are there any limitations to the tax benefits of long-term care insurance?

Yes, there are limitations to the tax benefits of long-term care insurance.

How are long-term care insurance premiums tax-deductible?

Long-term care insurance premiums may be tax-deductible if they exceed a certain percentage of the policyholder’s income and the IRS considers the policy qualified.

What are IRS long-term care benefits?

The IRS does not provide long-term care benefits. However, some long-term care expenses may be tax-deductible if they meet specific criteria outlined in the tax code.

Are benefits from long-term care insurance taxable?

Benefits from a qualified long-term care insurance policy are generally not taxable as income. However, if the benefits exceed a per diem limit set by the IRS, the excess could be taxable. Additionally, benefits might be taxable if premiums are paid with pre-tax dollars or if an employer pays the premiums and doesn’t include them in the employee’s gross income. Always consult with a tax professional regarding specific circumstances.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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