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...
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...
