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Dumb tax question about receiving long-term care insurance benefits
Old 02-28-2012, 02:21 PM   #1
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Dumb tax question about receiving long-term care insurance benefits

I'm doing my Dad's tax returns, and I'm trying to understand how to account for his long-term care insurance benefits.

Dad's been in a full-care facility for most of 2011. This includes 167 days for which he was considered private pay and was not covered by Medicare. However he claimed benefits under his John Hancock's long-term care insurance.

JH is very careful to only reimburse the long-term care expenses. For that 167 days I've been getting the care facility's bill and paying it (in advance of the coming month), then faxing it to JH. The following month (after the month of care has passed), JH has sent me a check. Dad didn't have any of JH's money until after he paid his own money.

However JH also sent him a 1099-LTC. It clearly states that it's a reimbursement and not "per diem".

TurboTax first asks about 1099s in the income section. When I entered the 1099-LTC it asked if it's a reimbursement and how much he paid in care expenses. It correctly concluded that the amount on the 1099-LTC was not income. I know that the proceeds paid to a beneficiary of a life insurance policy are not income, and I'm guessing that long-term care insurance benefits (paid as a reimbursed) are also not income.

According to IRS Pub 525 (taxable & non-taxable income): "Limit on exclusion. The exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract is subject to a limit. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill. (For more information on accelerated death benefits, see Life Insurance Proceeds under Miscellaneous Income, later.)
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts."

So that makes it seem as if the amount of insurance received can be excluded from income. No problem there.

TurboTax then asks about deductions. I broke it all down by their categories of prescriptions, clinic visits, medical professionals, and "nursing homes". For the first three I only included the expenses that my father paid out of his pocket. Most of those bills were covered by Medicare or Medigap or his pension's prescription insurance plan, so he didn't pay much.

However he paid plenty for the "nursing home", and TurboTax at first concluded that it's all deductible. "Woo-hoo." Then it asked what "medical insurance reimbursement" he received. I'm guessing that should be the amount of the LTC insurance paid out by JH.

At first it seems as if I'm double-booking the numbers. According to TurboTax the 1099-LTC was not considered income, and then I got to deduct the expenses of the care facility, but then I had to adjust the deduction to reflect the insurance company's payment. That makes sense: I would think that he'd only be able to deduct the unreimbursed expenses of the care facility.

I guess that TurboTax first makes sure that the LTC insurance payments are not income. Then, in the deduction section, it only allows deducting expenses in excess of the LTC insurance payments.

That makes sense. I would think that the only medical expenses that I could deduct would be those that weren't already covered by the insurance. The 1099-LTC might say $40K on it, and it's not income. However if Dad had LTC expenses of $42K and received LTC insurance benefits of $40K, then only $2000 would be deductible.

I'm applying logic to the tax code, but that's irrelevant.

Does anyone know whether it's legal to deduct the $2000 or whether it's legal to deduct the $42,000?

The difference is an $8000 tax bill, so the question has some significance...
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Old 02-28-2012, 03:09 PM   #2
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Boy, if there were ever a situation where I would go talk to my friendly neighborhood CPA, this is it.
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Old 02-28-2012, 03:55 PM   #3
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Nord,
TT makes a big deal about their user community board and online experts (I have not personally used). Since there is no cost, suggest you give that a try before the CPA visit
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Old 02-28-2012, 04:08 PM   #4
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Nords,

I am not sure that I am following all that you put down... but I think you are double counting... from the IRS website, my bold:

"You can only include the medical expenses you paid during the year. Your total deductible medical expenses for the year must be reduced by any reimbursement of deductible medical expenses. It makes no difference if you receive the reimbursement or if it is paid directly to the doctor, hospital, or other medical provider. "
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Old 02-28-2012, 04:11 PM   #5
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Nord,
TT makes a big deal about their user community board and online experts (I have not personally used). Since there is no cost, suggest you give that a try before the CPA visit
Nwsteve
That's a great idea. I used it myself this year and got good responses.

Another thing to try, if you have not already done so, is complete the return (without filing) both ways and run the error check and also the Audit check to see if TT throws up any warning flags.
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Old 02-28-2012, 05:37 PM   #6
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If the premiums were taken as medical deductions when paid the expenses that are covered by reimbursement are probably not deductible. If the premiums were not deducted then the entire expense should be deductible now.
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Old 02-28-2012, 06:05 PM   #7
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Nord,
TT makes a big deal about their user community board and online experts (I have not personally used). Since there is no cost, suggest you give that a try before the CPA visit
Nwsteve
Fairmark is where I always go for good tax advice.
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Old 02-28-2012, 07:50 PM   #8
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Boy, if there were ever a situation where I would go talk to my friendly neighborhood CPA, this is it.
Well, yeah, and if it were any time of the year but tax season I'd be willing to try it. My BIL is a CPA and I don't even swap e-mail with him from late Jan until May.

Quote:
Originally Posted by Alan View Post
That's a great idea. I used it myself this year and got good responses.
Another thing to try, if you have not already done so, is complete the return (without filing) both ways and run the error check and also the Audit check to see if TT throws up any warning flags.
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Nord,
TT makes a big deal about their user community board and online experts (I have not personally used). Since there is no cost, suggest you give that a try before the CPA visit
Nwsteve
Quote:
Originally Posted by Buckeye View Post
Fairmark is where I always go for good tax advice.
Thanks, Alan, that'll be interesting to see what TT thinks on the audit check. They obligingly let me wipe out the tax bill in the first place, which made me a little skeptical.

Lemme poke around the other forums. I think I'm on the right track (the one that pays more taxes and doesn't invite an IRS audit) but I can always use a little more confirmation bias.
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Old 02-29-2012, 01:59 AM   #9
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Nords......I would second the fairmark.com forum

I think your gut feeling of no double dipping is probably correct and pretty universal (like for child care, medical insurance,casualty losses). If you had expenses
of X and got reimbursed Y, you could deduct X - Y (provided X > Y). Perhaps the
income consideration pertains to the unlikely case where Y > X in which case that
excess would be considered income..........or where per diem expenses > allowed
************************************************** ************
EXECUTIVE SUMMARY

Long-term care (LTC) insurance benefits are tax-free to the insured for either reimbursement of qualified expenses or payments up to a per-diem limit indexed for inflation—$270 in 2008. Long Term Care Insurance and Tax Planning
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Old 02-29-2012, 04:34 AM   #10
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I use Intuit ProSeries, so don't know the ins and outs of Turbo Tax.

You are right that you can't take advantage of something twice generally. It is interesting what you are saying. I'd like to understand more, though, because in-laws are beginning to use the LTC.

1. First, make sure the LTC premiums if any are still entered. JH told us to pay the premium so policy is in effect up to time you start using it. Then they reimburse premium pro-rated. This may have happened in your first year of use.
2. It seems you have a good handle on the expenses covered by prescription plans, medicare and so on. Those can't be deducted.
3. There is a cost out of pocket to the nursing home. That is deductible.
4. Did you have a period in the beginning where you have to pay towards a deductible?

In any event, you have the checks and know what you paid out of pocket. The portion that exceeds 7.5% of income is deductible.

Can you list the box numbers and amounts for that form? I'd like to do a what-if on in-laws taxes to see what effect there'll be in their situation.
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Old 02-29-2012, 08:37 AM   #11
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Personally I'd just do whatever TurboTax said.
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Old 03-01-2012, 11:57 PM   #12
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Nords......I would second the fairmark.com forum
Long-term care (LTC) insurance benefits are tax-free to the insured for either reimbursement of qualified expenses or payments up to a per-diem limit indexed for inflation—$270 in 2008. Long Term Care Insurance and Tax Planning
Bingo. Only the "unreimbursed" expenses are deductible.

I'm going to have to start thinking of Fairmark as more than "just the Roth IRA conversion site".

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1. First, make sure the LTC premiums if any are still entered. JH told us to pay the premium so policy is in effect up to time you start using it. Then they reimburse premium pro-rated. This may have happened in your first year of use.
JH is pretty insistent about that. They even had me send a check in early July so that they could cash it and then send me a premium-reimbursement check in late July. The premium-collecting guys do not even appear to talk to JH's claims-processing staff or the medical clerical staff. I talked with a different person in each one of those departments.

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2. It seems you have a good handle on the expenses covered by prescription plans, medicare and so on. Those can't be deducted.
Well, technically they were never incurred in the first place. The only bills I see are the co-pays and whatever's not covered by Medicare, "Medigap", or Medco. Dad's Westinghouse pension (and his Bankers Life & Casualty Medigap supplemental insurance) and his Medco pension prescription plan appear to be the last of the golden age of pension coverage.

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3. There is a cost out of pocket to the nursing home. That is deductible.
I think the term "out of pocket" is the same as "unreimbursed". TurboTax also checks whether the "long-term care" expense is in a care facility or in a private home, which hadn't occurred to me. But I've read of long-term care being administered in a private home through nurses & aides.

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4. Did you have a period in the beginning where you have to pay towards a deductible?
There might be a need for that sort of insurance product. I'm only familiar with JH's 90-day exclusion period. My father's sequence was 13 days in a hospital and then six weeks in the "skilled nursing facility" portion of the care facility as a Medicare-covered rehab. That segued into 90 days of JH's exclusion period (at Dad's expense) in the same care facility, and then JH started reimbursing his expenses. The facility includes Alzheimer's care (although they lack a locked memory-care wing) and hospice, so hopefully Dad never has to move.

JH is actually a little tricky about reimbursement. Dad's care facility currently charges $214/day, but his max coverage in 2011 was $240.66/day. JH has been paying the $240.66/day. The 90-day exclusion period, though, kept Dad's expenses "way ahead" of reimbursement. He also had to pay nearly $4000 for a one-time neuropsychologist's in-depth assessment to "prove" to the satisfaction of the probate court and JH that he was not capable of independent living and sufficient activities of daily living.

Last month the JH policy's 5% inflation rider kicked in (for the 19th of 20 annual times) to raise that to $252.70/day. Next January it'll kick up one more time to $265.33/day. Unless the care facility gets aggressive about their own pricing, it's hypothetically possible that JH will pay more in 2012 "reimbursement" than Dad will spend in facility fees. Of course that depends on Dad staying healthy and on the prescription costs not getting out of control, either. Between the care facility fees and Dad's health, though, I fear that excess reimbursement will not be an issue.

The JH policy is capped by total payout (~$318K), which I project will occur near the end of 2014. From there he'll be on his own. 2015 will give him plenty of unreimbursed expenses for Schedule A medical deductions. Yay.

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In any event, you have the checks and know what you paid out of pocket. The portion that exceeds 7.5% of income is deductible.
Yep, by just a few bucks. The 90-day exclusion, the cost of the Medicare policy premium (from his Social Security statement), the cost of his Medigap policy premium, and the neuropsych exam put him over the top of that hurdle. I'm hoping that he stays healthy enough in 2012-14 to not exceed the 7.5% hurdle anymore.

By the way, the $9800 legal costs of obtaining a guardian and a conservator do not appear to be deductible in any way. But we donated a lot of his apartment's old furniture and his old business clothes to Goodwill.

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Can you list the box numbers and amounts for that form? I'd like to do a what-if on in-laws taxes to see what effect there'll be in their situation.
I'm going to have to finish filing his taxes and save the file to a PDF before I actually trust the numbers in the forms. I was able to cobble together about $50K of medical expenses and JH sent a 1099-LTC for ~$40K of reimbursements. So far TurboTax has filled out blocks 21-25 of Form 8853 and, of course, Schedule A lines 1-4. There's a "Medical Expenses Worksheet" for Sched A but I don't know if that's a federal form or a TurboTax proprietary worksheet.

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Personally I'd just do whatever TurboTax said.
Well, as Alan said, it wasn't very explicit. I filled out the tax return both ways and TT never said a word. However way back at the end of the error check it mentioned that I should ensure I deducted only the medical expenses for which he was not reimbursed. Between Fairmark and TurboTax's weasel phrasing we appear to be covered.

I think all the income questions in the first part of the TurboTax program were designed to ensure that the LTC payments did not have to be treated as income. After passing that test ("not income"), they were still treated as reimbursements.
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Old 03-03-2012, 01:43 PM   #13
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OK, the return has been transmitted and accepted. Payment will happen later this month.

During tax year 2012 he's probably not going to exceed the standard deduction, so I'm glad I got 2011 sorted out. Thanks for helping me think this through.

Now I can finish off Dad's estimated federal/state taxes and figure out how much of his equities to liquidate this year.

Gosh, then I can get started on our tax returns!
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