Long-term care and accelerated death benefits are reported on Form 1099-LTC

What is Form 1099-LTC?

You may receive Form 1099-LTC if you are the policyholder of a long-term care insurance contract and received payments from that contract. Accelerated death benefits and viatical settlements are also reported on Form 1099-LTC. A viatical sale is when a chronically or terminally ill individual sells their life insurance to a third-party buyer so they can use the money while still alive.

Form 1099-LTC may include payments made directly to the policyholder or payments made to third parties, such as care providers, on the policyholder’s behalf. Government agencies and viatical settlement providers may issue this type of payment on Form 1099-LTC as direct payers or third parties.

The insured may also be a different person from the policyholder, such as a spouse who pays the premiums or a child who takes out a policy for an aging parent. Copy B is issued to the policyholder, and Copy C is issued to the insured. The insured won’t owe taxes on these payments, but the policyholder may owe taxes, depending on whether they are also the insured and the circumstances of the payments.

Chronically ill and terminally ill individuals

In Box 5, the issuer may indicate whether they have a certification that the policyholder is terminally or chronically ill. While this certification is not required, it must be considered for viatical settlement approval and the tax treatment of long-term care payments and accelerated death benefits that are reported on Form 8853.

Generally, the IRS defines a chronically ill individual as someone who a licensed healthcare provider has determined cannot care for themselves on a daily basis. This includes basic activities, such as dressing, eating, toileting, and bathing. The healthcare provider typically certifies the individual's condition every year, because the individual must have demonstrated permanent loss of basic function for at least 90 days. Alternatively, the healthcare provider can also prove that the individual is cognitively impaired to the point that they need substantial supervision for their own health and safety.

A terminally ill individual is someone a physician determines can be reasonably expected to live 24 months or less from the date of certification.

Terminally ill individuals typically do not owe taxes on benefits they receive, but chronically ill individuals might owe taxes on certain payments.

Understanding the boxes on Form 1099-LTC

• Gross benefits are reported in Box 1, and accelerated death benefits (including viatical settlements) are reported in Box 2. This distinction is important, particularly if the recipient is chronically or terminally ill. Some or all of the amounts reported in these boxes may be taxable depending on whether there were unreimbursed care expenses and other factors.
• Box 3 indicates whether the payments were periodic or per diem (tax-free daily payments for expenses), and whether they were reimbursed directly to the policyholder or to third parties, such as homecare agencies. Per diem payments are tax-exempt up to $420 daily ($12,775 monthly) and can be paid without regard to qualified expenses, while reimbursed amounts are specifically for care expenses.
• Box 4 is optional. It indicates whether the long-term care contract is qualified. This ultimately affects how the payments are reported on Form 8853, because non-qualified and qualified contracts require slightly different exemptions and computations. In most cases, a qualified long-term care contract was issued after 1996 and must be issued for chronically ill individuals, among other requirements.

Confused? We can help. A Jackson Hewitt Tax Pro can explain this form and what to do with it. Taxes can be complicated, but you are not on your own. Contact us today.

About the Author

Mark Steber is Senior Vice President and Chief Tax Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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