How did an annual lump-sum premium affect Virginia's long-term-care insurance credit and deduction for 2006 and 2007?

Subject

Calculation of the Long-Term Care Insurance Tax Credit

Plain-English summary

Virginia applied the long-term-care insurance credit to the full first annual lump-sum premium paid in 2006, rather than prorating it over the two months remaining in that calendar year. Va. Code § 58.1-339.11 A provided a credit equal to 15% of premiums paid during the taxable year, capped at 15% of premiums for the first 12 months of coverage.

Because the November 2006 payment covered the policy's first 12 months, the taxpayer could use the full eligible payment in calculating the 2006 credit. The taxpayer's monthly proration would have been appropriate only if premiums were actually paid monthly.

The first-12-month credit had already been fully claimed in 2006, so the annual premium paid in 2007 did not generate a new credit. Instead, the ruling allowed the 2007 payment as the Virginia deduction under Va. Code § 58.1-322 D 10, subject to the federal-medical-expense assumptions described in the source. Any unused 2006 credit could carry forward for up to five taxable years or until used.

What this means for you

• The timing and form of the actual premium payment mattered; annual and monthly payment arrangements produced different year-by-year calculations.
• Under the law applied, the credit was limited to premiums for the policy's first 12 months of coverage.
• Later annual payments could support the Virginia deduction after the first-12-month credit was exhausted.
• Credit carryover depended on the taxpayer's liability and could last up to five taxable years under the cited provision.
• These percentages and deductions reflect the law applied to 2006-2007; confirm current Virginia law before filing now.

Common questions

Q: Why was the 2006 premium not divided into two months?
A: The taxpayer made one annual payment covering the first 12 months, rather than monthly payments for November and December.

Q: Did the 2007 annual premium create another credit?
A: No. The ruling said the full allowable first-12-month credit had already been claimed in 2006.

Q: What tax benefit applied to the 2007 payment?
A: The full annual payment was used for the Virginia deduction under the assumptions stated in the ruling.

Q: Could unused 2006 credit be carried forward?
A: Yes. Va. Code § 58.1-339.11 C allowed carryover for five taxable years or until fully used, whichever came first.

Citations and references

• Va. Code § 58.1-339.11 A and C.
• Va. Code § 58.1-322 D 10.
• P.D. 07-211 (Dec. 5, 2007).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-165

Original ruling text

August 29, 2008

Re: Ruling Request: Calculation of the Long-Term Care Insurance Tax Credit

Dear *:

This is in response to your letter of April 9, 2008, in which you requested a review of your calculations regarding the long-term health care insurance credit (the "Credit") and deduction (the "Virginia Deduction") for taxable years 2006 and 2007. In addition, you asked if the Department of Taxation ("TAX") will be issuing any further guidance for the 2008 taxable year.

On your worksheet for 2006, you indicated that you purchased a long-term care insurance policy in November of 2006 and made a payment of *. For federal tax purposes, this amount was limited to and you had of other medical expense deductions. Because the 7.5% floor for the federal medical deductions was greater than the allowable amount of the long-term care insurance premiums, you were allowed to use the entire amount of *** in determining your Credit.

In calculating your Credit for taxable year 2006, you first divided the total amount paid by twelve in order to determine your monthly premium amount. You then multiplied the monthly premium amount by two in order to reflect the fact that your policy was in place for two months in 2006. This amount was then multiplied by 15% in order to determine the amount of the Credit.

Assuming that your policy was actually in effect for the month of November, these calculations would be correct if you had paid for your long-term care insurance using monthly premiums. You have informed my staff, however, that you make one lump sum payment per year. The payment that was made in November of 2006 was for the first twelve months of your policy. Under Va. Code § 58.1-339.11 A, the amount of the Credit for each taxable year is equal to 15% of the amount paid by the individual during the taxable year in long-term care insurance premiums for long-term care insurance coverage. The total amount of the Credits, however, may not exceed 15% of the amount of premiums paid for the first 12 months of coverage. Therefore, because your payment in November of 2006 was for the first twelve months of your policy, you may use the full * amount in determining the amount of your credit. Multiplying by 15% results in an allowable Credit amount of ** for the 2006 taxable year.

On your worksheet for 2007, you indicated that you made your yearly payment of *. For federal tax purposes, this amount was limited to and you had of other medical expense deductions. Because the 7.5% floor for the federal medical deductions was greater than the allowable amount of the long-term care insurance premiums, you were allowed to use the entire amount of *** in determining your Credit and Virginia Deduction.

In calculating your Virginia tax preferences for taxable year 2007, you again divided the total amount paid by twelve in order to determine your monthly premium amount. You then multiplied the monthly premium amount by ten in order to reflect the fact that you had already claimed a Credit for the first two months of the policy in 2006. This amount was then multiplied by 15% in order to determine the amount of the 2007 Credit. In addition, you then multiplied the monthly premium amount by two in order to determine how much you paid for the final two months of 2007. That amount was your total for the Virginia Deduction.

Again, if you were making payments on a monthly basis, your calculations would have been correct. Because you make a lump sum payment every year, however, the amount of your tax preferences is different. In this case, you will have already claimed the total allowable amount of the Credit in 2006 because it may only be claimed for the first twelve months of the policy. This means that you will now only be allowed to claim the deduction for the remaining time that you are making payments on the policy. Under Va. Code § 58.1-322 D 10, you may deduct the amount that you annually pay in premiums. Therefore, because you paid * in 2007, that will be the amount of your Virginia Deduction.

Please note that these calculations assume that the figures that you have provided for your other medical expenses and the calculations of the 7.5% floor are correct. In addition, this determination does not take into account the fact that you may have some carryover from your Credit in 2006. Under Va. Code § 58.1-339.11 C, the Credit may be carried over for five taxable years or until it is fully used, whichever occurs first. The amount of your carryover will depend on your tax liability. Please see your 2006 Schedule CR in order to calculate your carryover amount.

In light of the clarifications made by Public Document 07-211 (12/5/07), changes will be made to the instructions for the 2008 individual income tax instructions in order to assist taxpayers in determining the correct amount of their credits or deductions. I certainly appreciate the suggestions you have made and I will make sure that they are passed on to those who are creating the forms and instructions for the 2008 taxable year.

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