Under Internal Revenue Code Section 101(g), the chronic illness tax treatment of accelerated death benefits lets you exclude those payments from gross income, but only up to $430 per day in 2026 or your actual qualified long-term care costs, whichever is greater. Anything above that ceiling is taxable. To keep the exclusion, you also need an annual physician certification, a written plan of care, and the right reporting on your tax return.
The rules for chronically ill recipients are stricter than the rules for terminally ill recipients, who face no dollar cap at all. Missing a certification deadline, skipping the plan of care, or overlooking Form 8853 can turn a tax-free benefit into unexpected income.
Who Qualifies as Chronically Ill
The tax code’s definition is narrower than the everyday meaning. A licensed health care practitioner must certify that you meet one of two tests under IRC Section 7702B(c)(2).1Office of the Law Revision Counsel. 26 U.S.C. 7702B – Treatment of Qualified Long-Term Care Insurance
The physical test: you cannot perform at least two of six activities of daily living without substantial help, and that inability is expected to last at least 90 days. The six activities are eating, toileting, transferring, bathing, dressing, and maintaining continence. The 90 days is a prospective expectation at the time of certification, not a waiting period before payments can start.
The cognitive test: you need substantial supervision to protect yourself from health and safety threats because of severe cognitive impairment. Advanced Alzheimer’s disease or dementia typically fits here. You do not need to fail the physical test if you meet the cognitive one.
Eligible practitioners include physicians, registered professional nurses, licensed social workers, and others meeting Treasury requirements.2Legal Information Institute. 26 U.S.C. 7702B(c)(4) – Licensed Health Care Practitioner
One boundary worth marking: if your condition is terminal rather than chronic (a physician certifies death expected within 24 months), a different rule applies and there is no per diem cap.3Office of the Law Revision Counsel. 26 U.S.C. 101 – Certain Death Benefits Everything below assumes chronic status.
The Per Diem Cap for 2026
The federal per diem limit for 2026 is $430 per day, up from $420 in 2025. It adjusts each year for inflation. The cap applies to the combined total of all periodic payments you receive from every qualified long-term care insurance contract and every accelerated death benefit paid under Section 101(g).1Office of the Law Revision Counsel. 26 U.S.C. 7702B – Treatment of Qualified Long-Term Care Insurance
Here is the calculation. For any period, compare your total periodic payments against the “per diem limitation,” which equals the greater of two figures: the indexed daily dollar amount ($430 multiplied by the number of days in the period), or your actual costs for qualified long-term care services reduced by any reimbursements from other insurance. If your payments exceed that limitation, the excess is taxable.
A worked example. Say you receive $170,000 in accelerated death benefits during 2026 and incur $140,000 in unreimbursed qualified care costs. The per diem figure for a full year is $430 × 365 = $156,950. Since $156,950 is greater than $140,000, the limitation is $156,950. You received $170,000, so $13,050 is taxable. If instead your actual unreimbursed costs had been $180,000, the limitation would be $180,000 and the entire $170,000 would be tax-free.
Higher actual care costs raise the ceiling. Track every qualified expense and keep receipts, because good documentation can convert a taxable overage into a fully excluded benefit.
Annual Certification and Plan of Care
The statute says you do not qualify as chronically ill unless a licensed health care practitioner has certified your condition within the preceding 12 months.4Office of the Law Revision Counsel. 26 U.S.C. 7702B – Treatment of Qualified Long-Term Care Insurance Let it lapse and every payment received after that point loses its tax-free status.
This is where claims quietly come apart. Families dealing with obvious, stable conditions assume renewal is a formality. The IRS does not. Set a calendar reminder and renew before the 12-month window closes.
The plan of care matters just as much. Qualified long-term care services are diagnostic, preventive, therapeutic, rehabilitative, maintenance, and personal care services that are (1) needed by a chronically ill individual and (2) provided under a plan of care prescribed by a licensed health care practitioner.1Office of the Law Revision Counsel. 26 U.S.C. 7702B – Treatment of Qualified Long-Term Care Insurance Paying a home health aide out of pocket is not enough on its own. A practitioner has to have prescribed that care in a documented plan. Without it, the expenses may not count as “qualified” for the exclusion, which shrinks the amount you can receive tax-free.
Viatical Settlements Follow the Same Rules
Some chronically ill individuals sell their life insurance policy to a viatical settlement provider for a lump sum instead of taking accelerated benefits from the insurer. Section 101(g)(2) treats that payment the same as an amount paid by reason of death, so it can qualify for the exclusion.3Office of the Law Revision Counsel. 26 U.S.C. 101 – Certain Death Benefits
The provider must be licensed in the state where the insured lives. If the state does not license viatical settlement providers, the provider must meet the National Association of Insurance Commissioners’ Viatical Settlements Model Act standards, including standards for evaluating reasonable payments. A provider that fails those standards can knock the payment out of the exclusion entirely.3Office of the Law Revision Counsel. 26 U.S.C. 101 – Certain Death Benefits
The per diem cap and actual-expense limits apply to viatical proceeds the same way they apply to accelerated benefits paid directly by an insurer. A large lump sum can blow past the ceiling in a single year. Before selling a policy, multiply $430 by the number of days in the year, compare against your expected qualified care costs, and estimate how much of the proceeds would be taxable.
Reporting on Form 1099-LTC and Form 8853
Insurers and viatical settlement providers report payments on Form 1099-LTC. Accelerated death benefits paid to or on behalf of a chronically ill insured appear in Box 2. Long-term care insurance benefits paid on a per diem or reimbursement basis appear in Box 1. Box 3 shows whether payment was per diem or reimbursement.5Internal Revenue Service. Instructions for Form 1099-LTC
If you received per diem or periodic payments as a chronically ill individual, complete Section C of Form 8853.6Internal Revenue Service. Instructions for Form 8853 You enter total payments, the number of days in your long-term care period, the per diem dollar amount, and your unreimbursed qualified care costs. The form walks through the comparison and produces the taxable amount, if any, that flows to your Form 1040.
Reimbursement-basis payments that did not exceed your actual expenses are simpler; you still note them on Form 8853 but there is typically no taxable amount. Either way, keep every 1099-LTC, receipt, and care-plan document for at least three years after filing. The IRS can ask you to substantiate both the medical certification and the expenses used in the exclusion calculation.
You Cannot Also Deduct the Same Expenses
If you excluded payments that reimbursed your long-term care costs, you cannot then claim those same costs as itemized medical expenses. Section 213 limits the deduction to expenses “not compensated for by insurance or otherwise.”7Office of the Law Revision Counsel. 26 U.S.C. 213 – Medical, Dental, Etc., Expenses So if insurance covered $140,000 in costs and you excluded that amount under Section 101(g), those dollars are off the table for Schedule A.
Any qualified expenses you paid out of pocket above what the insurance covered remain deductible, subject to the 7.5% of adjusted gross income floor. If total care costs were $200,000 and insurance covered $140,000, the remaining $60,000 could potentially be deducted.
Confirm Your Policy Is Tax-Qualified
The insurance contract itself has to meet the definition of a qualified long-term care insurance contract for the favorable tax treatment to apply. Section 7702B(b)(1)(B) prohibits the contract from paying or reimbursing expenses that Medicare already reimburses, except where Medicare is a secondary payer.4Office of the Law Revision Counsel. 26 U.S.C. 7702B – Treatment of Qualified Long-Term Care Insurance Most policies issued in recent years are designed to qualify, but older or non-standard contracts may not. Ask your insurer to confirm before you rely on the exclusion.
Watch the Effect on Medicaid and Other Benefits
Payments excluded from federal gross income can still count against means-tested programs like Medicaid. The cash you receive increases your countable assets, and Medicaid eligibility in most states depends on both income and asset limits. A lump-sum viatical settlement or a large accelerated benefit can push you over those thresholds. If you or a family member currently receives Medicaid or expects to apply, talk to a benefits planner before requesting accelerated benefits or selling a policy. Section 101(g) shields the payment from income tax; it does nothing to preserve government health coverage.