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The Internal Revenue Service (IRS) has published a 10-page PDF document, IRS Notice 2011-68 (PDF), that discusses tax rules that apply to annuity-long term care (LTC) benefits hybrids and exchanges of annuity cash surrender value for qualified LTC insurance.
Tax experts at the American Council of Life Insurers asked the IRS to put those issues on its 2011-2012 guidance priority list to help taxpayers make better use of their new freedom to exchange LTC insurance policies for other LTC insurance policies—and life and annuity contracts for LTC insurance policies—without necessarily paying extra income taxes.
Section 1035 of the Internal Revenue Code (IRC) has been letting taxpayers trade in life and annuity products for other life and annuity products tax-free for many years. A provision in the Pension Protection Act of 2006 added IRC Section 844, which lets taxpayers get or dispose of LTC policies through tax-free Section 1035 exchanges.
Although taxpayers have had the freedom to make the exchanges, there has been confusion on how to report the exchanges, or how the exchanges might affect their income taxes.
IRS officials say they believe all premiums paid for an annuity-LTC combination contract that is an annuity and also provides long-term care insurance are generally included in investment in the contract, as long as the combination premiums are credited to the contract’s cash value, rather than directly to the LTC insurance contract, and coverage under the LTC insurance contract is paid for by charges against the cash value of the contract, officials say.
IRS officials also have confirmed that a taxpayer can use a Section 1035 exchange to trade in a portion of the cash surrender value of an existing deferred annuity for a qualified LTC contract, and the officials have discussed the basis of a qualified LTC contract.
The IRS also has included a section of questions for the public it may use to develop additional guidance for life and annuity contracts with LTC insurance features. Comments on the document are welcome, but must be made by Nov. 9.
Individuals should consult with their tax advisor on any IRS matters to ensure the most appropriate handling of finances. CompassQuote provides term and universal life insurance and will help lead you to the best policy in the nation.
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