07-211 | Virginia Tax

Tax Type

Individual Income Tax

Description

Long-Term Care Insurance Tax Credit

Topic

Computation of Tax

Credits

Date Issued

12-05-2007

December 5, 2007

Re: Ruling Request: Long-Term Care Insurance Tax Credit

Dear *****:

This is in response to your e-mail of August 19, 2007, in which you requested a ruling regarding the Long-Term Care Insurance Tax Credit (the "Credit") and its interaction with the Virginia Deduction for Long-Term Health Care Premiums (the "Virginia Deduction") and the Federal Deduction for Medical Expenses (the "Federal Deduction").

FACTS

After corresponding with one of your legislative representatives and having discussions with a member of my staff regarding the instructions provided by the Department of Taxation ("TAX") for the Credit, you have written to further demonstrate how complicated it is for taxpayers to determine the appropriate amount of long-term care insurance premiums to use in calculating the tax preferences involving long-term care insurance.

RULING

Determining which tax preference to use for long-term care insurance premiums and the appropriate amount on which such a tax preference must be based is difficult because there are three different tax preferences at work. Two are provided by Virginia; and one is offered by the federal government.

The Federal Deduction

Under the Federal Deduction, an individual may elect to deduct the portion of his or her medical and dental expenses, including long-term care insurance, which is more than 7.5% of the individual's adjusted gross income (the "7.5% floor"). An individual is allowed to deduct long-term care insurance premiums paid for himself, a spouse or dependent(s).

The amount of qualified long-term care premiums that can be deducted is limited, however. This limitation is based on age. For 2006, for example, if the individual for whom the policy was purchased is age 40 or under, the maximum allowable deduction is $280, for age 41 to 50 the maximum deduction is $530, for age 51 to 60 the maximum deduction is $1,060, for age 61 to 70 the maximum deduction is $2,830, and for individuals age 71 and over the maximum deduction is $3,530.

The Credit

Virginia Code § 58.1-339.11 A, which describes the Credit, states in part, "For taxable years beginning on or after January 1, 2006, any individual shall be entitled to a credit against the tax levied pursuant to § 58.1-320 for certain long-term care insurance premiums paid by the individual during the taxable year pursuant to an insurance policy entered into on or after January 1, 2006. The amount of the credit for each taxable year shall equal 15% of the amount paid by the individual during the taxable year in long-term care insurance premiums for long-term care insurance coverage for himself, but in no event shall the total credits over the life of any policy exceed 15% of the amount of premiums paid for the first 12 months of coverage."

For example, suppose that Taxpayer A purchases a long-term care insurance policy for himself beginning on November 1, 2006. The premiums are $100 per month. For taxable year 2006, Taxpayer A's Credit will be $30, which is 15% of $200. In 2007, Taxpayer A will pay a total of $1,200 in premiums. His Credit, however, is limited to $150 rather than $180. This is because the total amount of the Credit may not exceed 15% of the premiums paid for the first 12 months of coverage. Because Taxpayer A received a credit on his 2006 return for the premiums paid for the two months of coverage for taxable year 2006, he may only base his Credit on the premiums paid for the first 10 months in taxable year 2007. Thus, his Credit will be 15% of $1,000, or $150.

This Credit has further restrictions as well. Under Va. Code § 58.1-339.11 C, "The credit described in this section shall not be claimed to the extent the individual has claimed a deduction for federal income tax purposes for long-term care insurance premiums for himself or a deduction under subdivision D 10 of § 58.1-.322." Therefore, a taxpayer may not base the Credit on the same premiums that were used for either the Federal Deduction or the Virginia Deduction.

This can become complicated, however, because of the limitations placed on the Federal Deduction. First, the amount of premiums that may be deducted is limited according to the age of the person for whom the policy was purchased, and then the taxpayer must overcome the 7.5% floor. In such a situation, Virginia will look only at the amount of the premiums that were actually deducted by the taxpayers.

For example, suppose Taxpayer B is utilizing the Federal Deduction. During taxable year 2006, he bought along-term care insurance policy for himself and paid premiums in the amount of $6,000. Because he is over 71 years old, the amount he can include in his federal itemized deduction for medical expenses is limited to $3,530. When combined with other medical expenses of $1,470, his total itemized deduction for medical expenses is $5,000. He calculates his 7.5% floor and determines that it is $4,000. Thus, Taxpayer B's Federal Deduction will be $1,000. Because Taxpayer B's Federal Deduction is less than the $1,470 in medical expenses other than long-term care insurance premiums, he never actually deducted any of those premiums on his federal income tax return. Thus, he may use the full $6,000 of premiums in determining the amount of his Credit.

If, however, Taxpayer B had calculated his 7.5% floor and it was only $2,000, he would not be able to use the full amount of premiums in calculating his Credit. In that case, his Federal Deduction would have been $3,000. Out of that amount, $1,530 would have been made up of long-term care insurance premiums ($3,000 less $1,470 other medical expenses). Therefore, Taxpayer B would only be able to base his Credit on the $4,470 of remaining premiums ($6,000 premium paid less $1,530 premium deemed included in the Federal Deduction).

The Virginia Deduction

Under Va. Code § 58.1-322 D 10, "For taxable years beginning on and after January 1, 2000, the amount an individual pays annually in premiums for long-term health care insurance, provided the individual has not claimed a deduction for federal income tax purposes, or a credit under § 58.1-339.11." Although the emphasized "provided" clause has been interpreted in our instructions and forms to mean that the Virginia Deduction may not be used if either the Federal Deduction has been claimed or the Credit has been taken, I no longer believe that interpretation is correct.

The emphasized clause was included in the 1999 legislation that created the Virginia Deduction because the placement in subsection D instead of subsection C of § 58.1-322 created the possibility of a double benefit for the same premium. Subsection C is prefaced by the clause "to the extent included in federal adjusted gross income," which automatically prevents the allowance of a Virginia subtraction for something that has already been deducted in computing federal adjusted gross income. Because the introduced version of the bill that created the Virginia Deduction placed it in subsection D, which does not have such a preface, a double benefit was possible. Therefore, the bill was amended to add the emphasized clause. As the language does not include "to the extent that" or any other indication of proportionality, the amendment created an all or nothing condition for the allowance of the Virginia Deduction.

In 2006, however, this section was amended to coordinate with the provision allowing the Virginia Credit. As previously noted, § 58.1-339.11 limits the Credit only "to the extent that" the taxpayer has claimed the Federal and Virginia Deductions. This appears to create a contradiction because § 58.1-339.11 will allow a Credit to the extent that premiums have not been deducted under § 58.1-322, but the latter section will not permit the Virginia Deduction to be used if the Credit has been claimed.

Therefore, I now conclude that the statutory conditions on the allowance of the Virginia Deduction and the Virginia Credit can be harmonized only by interpreting the emphasized "provided" clause in § 58.1-322 D 10 as a proportional condition in the same manner as for subtractions allowed under subsection C of § 58.1-322. That is, the taxpayer can claim the Virginia Deduction for premiums that have been not previously been used as the basis of the Federal Deduction or the Virginia Credit.

For example, suppose that Taxpayer C purchases a long-term care insurance policy for himself beginning on November 1, 2006. The premiums are $100 per month. For taxable year 2006, Taxpayer C's Credit will be $30, which is 15% of $200. In 2007, Taxpayer C will pay a total of $1,200 in premiums. While the calculation of his Credit is limited to the premiums paid for the first 10 months in taxable year 2007, Taxpayer C may then use the Virginia Deduction for the remaining two months of premiums. Thus, Taxpayer C will have a Credit in the amount of $150 and a Virginia Deduction in the amount of $200.

The use of the Virginia Deduction in conjunction with the Federal Deduction will operate in the same manner. The taxpayer will only be allowed to deduct premiums on his Virginia income tax return that he has not already deducted on his federal return. Again, Virginia will look only at the amount of the premiums that were actually deducted by the taxpayers.

Use by Spouses

In your letter to me, you refer to a statement made in my earlier response that described the use of the different preferences by spouses. You state that you cannot find any information regarding this in the Virginia individual income tax instructions.

You are correct that this information is not contained in the instructions. When two spouses file a joint return, however, there are two separate taxpayers involved. Thus, even though only one return is filed, each taxpayer must consider his or her own specific situation. Please note that the use of some tax preferences by spouses is limited by the law. In addition, whether or not a taxpayer is filing a single or joint return, in the absence of federal or state rules specifying the order or manner in which the preferences must be claimed, Virginia allows taxpayers to claim tax preferences in the manner that is most advantageous to them.

I hope that this reply has helped to resolve some of the confusion surrounding these tax preferences. The Code of Virginia sections cited and other reference documents are available -on-line in the Tax Policy Library section of the Department of Taxation's website located at www.tax.virginia.gov. If you should have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Policy Development, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

Rulings of the Tax Commissioner