Long-term care insurance helps cover costs for nursing homes, assisted living, and in-home care. When benefits are paid, the IRS requires insurers to issue Form 1099-LTC to report these payments. Many recipients wonder whether they owe taxes on this money.
The tax treatment of long-term care benefits depends on policy type and how the funds are used. Understanding these rules helps avoid unexpected tax liabilities and ensures proper reporting.
Who Receives Form 1099-LTC
Form 1099-LTC is issued to individuals receiving benefits from a long-term care insurance policy or a life insurance policy with an accelerated death benefit rider. The payer files Form 1099-LTC with the IRS and must furnish statements to the policyholder and to the insured, even if payments were made directly to a care provider. 1Internal Revenue Service. Instructions for Form 1099-LTC
Recipients include policyholders receiving payments for their own care and individuals receiving benefits on behalf of someone else. If payments are directed to a nursing home or home health provider, the form may still be issued in the policyholder’s name. If the policyholder has passed away, the form may be issued to their estate.
The form details total benefits paid, whether payments were per diem or reimbursement-based, and whether they came from a qualified or non-qualified policy. It may also indicate if benefits were paid under an accelerated death benefit provision, which applies when a life insurance policyholder is certified as terminally ill.
Taxability of LTC Proceeds
Long-term care insurance benefits are generally tax-free, but limits determine whether a portion is taxable.
For per diem policies, which pay a fixed daily amount regardless of actual expenses, taxability depends on whether benefits exceed the IRS daily limit. For 2024, the per diem limit is $410 per day; taxable income is calculated on Form 8853 by comparing total per diem payments to the larger of the $410-per-day amount or actual qualified long-term care costs (reduced by reimbursements). 2Internal Revenue Service. Instructions for Form 8853
For reimbursement policies, which cover actual expenses, benefits are not taxable as long as they do not exceed the total cost of qualified long-term care services. Payments for nursing home care, home health services, or assisted living remain tax-free.
If benefits are received under an accelerated death benefit rider and the insured is chronically ill, the exclusion rules above apply (including the per diem limit for periodic payments). If the insured is terminally ill (physician-certified expected to result in death within 24 months), accelerated death benefits are treated as paid by reason of death and are generally fully excludable. 3Legal Information Institute. 26 U.S.C. § 101(g)
A “chronically ill individual” is someone certified by a licensed health care practitioner as being unable to perform at least two activities of daily living for at least 90 days without substantial assistance, or as requiring substantial supervision due to severe cognitive impairment. 4Legal Information Institute. 26 U.S.C. § 7702B
Policy Types That Affect Taxable Status
The tax treatment of long-term care benefits depends on whether the policy is classified as qualified or non-qualified under IRS guidelines.
Qualified long-term care insurance policies meet federal requirements under the Health Insurance Portability and Accountability Act (HIPAA), ensuring benefits are generally tax-free. To qualify, policies must cover only medically necessary long-term care services and require certification of chronic illness or disability by a licensed healthcare professional. These policies cannot have cash surrender values, meaning they do not accumulate a payout beyond covering care expenses. 5Internal Revenue Service. Publication 502, Medical and Dental Expenses (2024)
Non-qualified policies do not meet HIPAA’s standards and may be subject to different tax rules. Benefits from these policies can be taxable, especially if considered income rather than reimbursement for medical expenses. Older policies issued before HIPAA’s 1996 enactment may fall into this category, making it important to verify whether they were grandfathered into qualified status or remain under older tax rules.
Hybrid policies that combine life insurance with long-term care benefits introduce additional tax considerations. These policies allow individuals to access a portion of their life insurance death benefit for care costs. If structured as long-term care payments under IRS definitions, they are typically tax-free. However, withdrawals outside these parameters may be taxable, especially if they exceed the total premiums paid into the policy.
How to Report on Tax Returns
Properly reporting long-term care benefits ensures compliance with IRS regulations and minimizes tax liability. Form 1099-LTC provides necessary details, but taxpayers must determine whether any portion of the payments is taxable.
For taxable benefits, report them on Schedule 1 (Form 1040), line 8z “Other income,” and list the type and amount. 6Internal Revenue Service. Instructions for Form 1040 (2024) – Schedule 1 Line 8z If your benefits were paid on a per diem basis (or you received accelerated death benefits on a per diem basis because the insured is chronically ill), you must include Form 8853 with your return to compute any excludable and taxable amount. 7Internal Revenue Service. Publication 525, Taxable and Nontaxable Income (2024)
If benefits are fully tax-free, no additional reporting is required beyond retaining Form 1099-LTC for records.
If long-term care expenses are used to claim a medical expense deduction, proper documentation is necessary. Qualified long-term care costs can be included in Schedule A (Itemized Deductions) to the extent total medical expenses exceed 7.5% of adjusted gross income (AGI). However, any reimbursed expenses cannot be deducted, so taxpayers must ensure they only claim out-of-pocket costs. 8Internal Revenue Service. Publication 502, Medical and Dental Expenses (2024)