Long-Term Care

(continued)

Long-Term Care Contracts - Taxation Issues

The Health Insurance Portability and Accountability Act of 1996, which became law on August 21, 1996, significantly changed the income tax aspects of LTC policies.

Benefits Excluded from Income: Beginning with contracts issued in 1997, benefits received under an LTC contract will generally be excluded from income as an amount "received for personal injury and sickness." IRS Sec. 7702B. In order for benefits paid under a contract to be excluded from income, the contract must meet strict requirements to be a "qualified" contract. Further, benefits must be for services provided to a "chronically ill individual." A limited grandfather clause applies to contracts in existence before 1997.

The exclusion from income is limited to$180 per day (calendar year 1998 [For calendar year 1997 the limitation was $175 per day.]) for contracts which pay benefits on a daily basis, without regard to actual expenses. This limitation will be adjusted for inflation in future years.

Long-Term Care Expenses are Medical Expenses: For tax years beginning in 1997, the Act also redefined the term "medical care" to include unreimbursed amounts an individual paid for qualified LTC services, as well as premiums paid for qualified LTC policies. IRS Sec. 213(d)(1), as amended. Such expenses thus qualify for the medical expense itemized deduction.

The Act limits the annual amount of LTC premiums that can be deducted, based on the age of the insured:

These annual limitation amounts will be adjusted for inflation in future years.

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