Tax Treatment of Long-Term Care
Insurance Policie Part IV
“It seems to me that, like any other allowable medical expense, a medical deduction under Form 1040 Scheduled A is allowed for non-tax qualified policies, subject to the 7.5% floor of adjusted gross income.
“This interpretation makes sense because Congress will never permit Grandma to have a pay full tax on benefits, and will enact a reversal if the IRS endorses the disability view, which would be terrible public policy. I believe that the disability interpretation will never happen.
“Second, the IRS has already distinguished between tax-qualified and non-tax-qualified policies in its treatment of tax deductibility of premiums. Why wouldn’t it make a further distinction in the area of benefits in order to make a tax-qualified policy more attractive to the consumer?
“Remember the importance of keeping the cost within the budget guidelines that Congress envisioned? The IRS is not going to depart radically from these guidelines. It doesn’t want benefits in a non-tax-qualified policy to be fully deductible because Congress has not factored into the budget substantial extra cost this would incur. In my view, the third option will be used in practice and, if challenged, will not be over-ruled by IRS or the courts: (Long-term care benefits would be taxable but would also qualify as a medical deduction under Form 1040 Schedule A, subject to the current floor of 7.5 % of adjusted gross income.)
“Regardless of the uncertainties of our political system, it seems to me that we have been given some direction here, even though the government and the insurance companies are unwilling to put this direction on paper. There are specific rules as to tax-qualified policies. The premiums are deductible as a medical expense under Schedule A with certain limitations. Although the benefits must be declared as income, they are fully deductible. As to non-tax qualified policies, the premiums are not a deductible medical expense. The benefits are deductible as a medical expense under Schedule A subject to the 7.5 % floor.
“Finally, assuming that this interpretation is correct, when will the government enforce these restrictions on non-tax-qualified policies? I don’t know, but there is a great deal of revenue involved and I don’t expect the IRS to continue the policy of benign neglect indefinitely. In my judgment, non-tax qualified policies may offer extra benefits to the policyholder, but the tax consequences will become substantial in many cases, especially if benefits are paid.”*
LTC Tax Treatment PREVIOUS 1, 2, 3, 4.
*By Louis H. Brownstone
California Broker Magazine, July 200