Tax TreatmentQuestion 234 of 315
How are benefits paid from a tax-qualified long-term care insurance contract generally treated for federal income tax?
a.Excluded from gross income up to the greater of the IRS per-diem limit or actual qualified LTC expenses
b.Always fully taxable as ordinary income
c.Subject to a 10% additional tax if received before age 59½
d.Fully tax-free, with no limit on the daily benefit excluded
Explanation
Under IRC §7702B, benefits from a tax-qualified LTC policy are excluded from gross income up to the indexed per-diem limit (set annually by the IRS) or the actual cost of qualified LTC services, whichever is greater. Reimbursement-style benefits paid for actual expenses are fully excluded; per-diem benefits are excluded up to the daily cap.
Law Reference: IRC §7702BPractice all 315 questions free — no signup required.
Related questions on this topic
- Which statement BEST describes the federal tax treatment of a Health Savings Account (HSA)?
- An investor purchases an existing $500,000 life insurance policy from the original owner for $40,000 and continues to pay $5,000 in annual premiums until the insured dies five years later. The investor is NOT one of the exempt transferees listed in §101(a)(2). How much of the $500,000 death benefit is taxable to the investor as ordinary income?
- While a non-MEC life insurance policy remains in force, how is an outstanding policy loan treated for federal income tax purposes?
- Which statement about the federal tax treatment of a Modified Endowment Contract (MEC) is TRUE?
- A policyowner wants to exchange a $50,000 cash-value whole life policy for a non-qualified deferred annuity. Which statement about the tax treatment is correct?
- A whole life policy fails the 7-pay test and is classified as a Modified Endowment Contract (MEC). Which statement BEST describes the tax consequence to the policyowner?
Last reviewed: · editorial process
PrepPass Editorial Team · Verified against California Life & Health Insurance License Exam · How we review