I know this isn’t quite on topic (IRAs), but . . .

THE SET-UP: I did a 135 exchange of life insurance to a single premium immed annuity (SPIA). The SPIA distributions are paid directly to long term care insurance policy (LTC). The 1035 exchange to the SPIA avoided taxes on the income generated from the life insurance. Prior to 2010, all non-excluded distributions from a SPIA were treated as taxable income. Starting in 2010,non-excluded distributions from a SPIA to fund LTC premiums were deemed not subject to tax.

THE QUESTION: What portion, if any, of the LTC premium is deductible? (Recall that the SPIA was paid from the cash-value proceeds of a life insurance policy, a portion of which was taxed – the cost basis, and a portion of which were untaxed – i.e. cash value minus cost basis.)

CONSIDERATION: Since the entire amount of the premium was deductible prior to 2010, and the purpose of the change on the taxation of the non-excluded portion was meant to encourage LTC purchases, it would seem counter-productive to not allow (at least a portion of) the LTC premium to be deductible.

Any guidance or suggestions you can provide would be appreciated.

Thanks, MC