The need for long-term care insurance in America is growing exponentially each year as of 2010. These policies pay out billions of dollars to nursing homes and skilled care providers that meet the daily needs of millions of elderly Americans. How these policies are taxed can have a substantial impact on what goes on your 1040 Form each year. Find out what you need to know about the tax status of long-term care benefits.
Taxation of Benefits
Most long-term care insurance policies today are issued as tax-qualified policies. This means that the benefits that they pay out are tax-free to the recipient in virtually all cases. For tax-qualified policies, there are no reporting requirements.
Deductibility of Premiums
Long-term care benefits can be deducted if the total amount of premiums paid exceeds 7.5% of the taxpayer's adjusted gross income. The amount in excess of this threshold can be deducted on Schedule A of the 1040, but the taxpayer must be eligible to itemize deductions. If this is not the case, then all premiums paid for the year are nondeductible.
Anyone who is eligible to open an Health Savings Account (HSA) can take an above-the-line deduction on all money paid into the account. This money can then be used to pay the premiums for the policy. Because this deduction is above the line -- meaning that it is deducted on the first page of the 1040 and is considered a deduction from gross income and not adjusted gross income -- it is not necessary to itemize deductions in order to claim it. (Itemized deductions are deductions from adjusted gross income, whereas above-the-line deductions are deducted in order to compute adjusted gross income.)
The insurance company should pay out the benefits in the policy directly to the care provider in most cases. If they pay the benefit to you, then you may have to declare it as income if you take constructive receipt of the money before sending it on to the care provider. Consult your tax or financial advisor or insurance agent for more information on this situation.
If the policy is not a tax-qualified policy and the benefits need to be taxed, the insurance carrier should notify you or send you a 1099 form. This form will tell you where to declare the income on the 1040 form.
Mark Cussen has more than 17 years of experience in the financial industry. He received his B.S. in English from the University of Kansas and became a Certified Financial Planner in 2001. He has published financial educational articles on such websites as Investopedia and Money Crashers. He also provides financial education and counseling for members of the U.S. military and their families.