LTC payment after death

[Possi]

My clients are MFJ. He was terminally ill in 2021 and had lots of medical expenses. 

We took the deduction for medical in 2021 and the NET expense final deduction was $15,487.

He went to Heaven in January 17, 2022, so there aren't really any medical expenses to deduct for 2022.

His wife received a 1099-LTC showing benefits paid in 2022 totaling $15,216.

Does this become miscellaneous income to her since we took the deduction in the prior year and they benefitted from it, in excess of the payment? 

I think that's what I'm picking up in my research but want to check with the REAL professionals! 

possi

 

[Lee B]

When did they actually receive the benefits?

[jklcpa]

8 hours ago, Possi said:

We took the deduction for medical in 2021 and the NET expense final deduction was $15,487.

By "net" , do you mean that is after subtracting the amount of reimbursement from the LTC contract, or do you mean something else? 

Which box is checked in box 3 of the 1099? Was it a per diem allowance or truly a reimbursement?  Do you know if the contract is a tax-qualified contract or a non-tax qualified one?

[Possi]

I’m sorry, I meant the deductible portion of the expense after the floor was met. 
 

I’m out of the office until Monday, so I’ll look again at the 1099 as soon as I get in. 
 

thank you! 

[Possi]

It's marked as "Reimbursed amount" on the 1099LTC.

Client was paid this amount, $15,217 in 2022 for overall expenses, some in 2021 and some in 2022. She is getting 2022 expenses totaled, but said it's around $8k actually paid by her in 2022.

[Possi]

3 hours ago, Possi said:

It's marked as "Reimbursed amount" on the 1099LTC.

Client was paid this amount, $15,217 in 2022 for overall expenses, some in 2021 and some in 2022. She is getting 2022 expenses totaled, but said it's around $8k actually paid by her in 2022.

She paid $8925 in 2022.

[DANRVAN]

It appears the amount of expense claimed as a deduction in 2021 and reimbursed in 2022 needs to be claimed as income. 

[Possi]

On 2/27/2023 at 5:40 PM, DANRVAN said:

It appears the amount of expense claimed as a deduction in 2021 and reimbursed in 2022 needs to be claimed as income. 

I don’t know how to make this right. Include the total paid MINUS what the 2022 expenses were? 
 

[TexTaxToo]

Yes, but only to the extent there was a tax benefit.  See Worksheet 2 and the discussion of "Itemized Deduction Recoveries" in Pub 525.

 

[DANRVAN]

1 hour ago, TexTaxToo said:

Yes, but only to the extent there was a tax benefit

And that amount would be the lower of:

-the actual deduction taken for LTC

-total medical deductions below the floor

-total itemized deductions less the standard deduction

-taxable income

[DANRVAN]

1 hour ago, DANRVAN said:

-taxable income

On second thought, I need to retract that statement regarding taxable income and crawl into my hole for the night.

 

Negative taxable income in the prior year would reduce the tax benefit from the deduction in the prior year.

 

So I believe the amount recognized would be the lower of the first three items stated above; reduced by negative taxable income.

 

 

 

[Possi]

9 hours ago, DANRVAN said:

And that amount would be the lower of:

-the actual deduction taken for LTC

-total medical deductions below the floor

-total itemized deductions less the standard deduction

-taxable income

 

10 hours ago, TexTaxToo said:

Yes, but only to the extent there was a tax benefit.  See Worksheet 2 and the discussion of "Itemized Deduction Recoveries" in Pub 525.

 

Ok, so I'm pounding this out now. There was a taxable benefit for the entire distribution. 

Distribution was 15,217.

Actual deductible amount on the 2021 Sch A was 15,487. (expenses $31787- $16,300 floor= 15,487 deduction)

In 2022 the medical expenses were $8925.

So, I start from the entire distribution...2022 distribution 15,217 - 8925 = 6292 taxable income. 

[DANRVAN]

47 minutes ago, Possi said:

So, I start from the entire distribution...2022 distribution 15,217 - 8925 = 6292 taxable income.

Frist you need to go back to 2021 and compute total itemized deductions less standard deduction.

 

The 2021 tax benefit would not be greater than that amount.

[DANRVAN]

1 hour ago, Possi said:

Actual deductible amount on the 2021 Sch A was 15,487. (expenses $31787- $16,300 floor= 15,487 deduction)

In 2022 the medical expenses were $8925.

I think you are missing part of the equation.

 

What was the actual amount of LTC expense reported on 2021 schedule A?

 

[Possi]

12 hours ago, TexTaxToo said:

Yes, but only to the extent there was a tax benefit.  See Worksheet 2 and the discussion of "Itemized Deduction Recoveries" in Pub 525.

 

Thank you! 

I went to the pub 525 and worked it out. @DANRVANThanks for all your help! 

[DANRVAN]

2 hours ago, Possi said:

In 2022 the medical expenses were $8925.

So, I start from the entire distribution...2022 distribution 15,217 - 8925 = 6292 taxable income.

As long as total expenses exceeded the reimbursement, the only amount taxable should be the 2021 tax benefit which was reimbursed in 2022.

 

Also you mentioned the taxpayer was deceased, so sounds like IRD possibly reported by his estate on form 1041.