Some of my clients are interested in single premium prepaid long-term care contracts. They also have a refund feature on these products. How do they deduct the long-term care costs when there are annual limits, but they pay it all at once? Also, what happens when they get a refund?
For any taxpayer who is governed by §213 (individuals, sole proprietors, partners, members in an LLC taxed as a partnership, and 2% or greater shareholders in an S corporation) the deduction is limited by the dollar ceiling. Under the Code’s literal language only deductions made during that year would be deductible. I checked for any IRS rules on this and did not see any.
It would seem reasonable that one could amortize the cost over the period of coverage and apply that to the annual limits, but I was unable to verify this so far. If anyone wants to comment on this please do.
When it comes to the refund feature of a LTC contract, any refund or complete surrender or cancellation of the contract is includable in gross income to the extent of any deduction or exclusion allowed for the premiums.
-Joe
