If an insured receives LTC benefits that exceed the daily tax-free cap, are the benefits automatically taxable?
For benefits exceeding the cap to be tax-free, they must be applied to long term care expenses. If the insured cannot demonstrate that the benefits were spent on such expenses, a portion of the benefits may be taxable. For example, if an insured receives an annual benefit of $110,000 but only spends $90,000 on long term care, up to $20,000 could be taxable. If the daily tax-free cap for the year in question is $290 per day ($105,850 annually), then $4,150 of the benefits will be taxable (the difference between the $110,000 received and the tax free cap of $105,850). On the other hand, if the daily tax-free cap in the year is $310 per day ($113,150 annually), then none of the benefits will be taxable.