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.Subject to a 10% additional tax if received before age 59½
b.Fully tax-free, with no limit on the daily benefit excluded
c.Excluded from gross income up to the greater of the IRS per-diem limit or actual qualified LTC expenses
d.Always fully taxable as ordinary income
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.
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Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)