by hummingbird » Sun Jun 22, 2008 12:03 am
My mother in-law claims that after my father in-law passed away she received 50,000 from his life insurance. Now she claims she never paid life insurance taxes and the IRS is claiming she has to pay the taxes on that amount. I never knew life insurance was taxable. IS it? :?
Posted: Sun Jun 22, 2008 09:57 pm Post Subject:
It's not....is there some chance that this money wasn't ENTIRELY life insurance? Was it a type of policy that ''earned'' something? One of the life ins...guru's hopefully will drop in on this thread....I know from handling my mother's affairs recently...that for instance...her husband had a life ins policy (several) that had 'life benefits'' of say 80k...then there was also some earnings of 12k...she had to pay taxes on that 12k...NOT the life ins. benefit however...
Posted: Mon Jun 23, 2008 12:29 am Post Subject:
No as far as I know it was a 50,000 life insurance policy. Nothing that earned anyhting that i know of.
Posted: Mon Jun 23, 2008 05:44 am Post Subject:
Lori is right. hummingbird, the benefits of a life policy aren't subjected to tax of any form in almost all the cases. But there are few exceptions too.
The IRS can impose life insurance taxes for forwarding the policy if they reckon it as a form of investment in disguise.
Again, the death benefit gets added to the value of the estate of the deceased and thus become taxable in the form of estate tax. It may also become taxable under the State inheritance taxes.
Also, if the life policy has the feature that enables the policy holder to withdraw a portion of the cash value gained by the policy, the amount becomes taxable as the income of the holder.
Posted: Mon Jun 23, 2008 11:13 am Post Subject: insurance
SOOO..if you 'add' to a life insurance policy, the part you 'added' can be taxable? Please clarify if I'm incorrect. Thanks.
Posted: Mon Jun 23, 2008 11:14 am Post Subject:
Thanks Carol, I was just sure it couldn't be pure life insurance. Hummingbird, you need to check on the exact ''type'' of policy.
Posted: Mon Jun 23, 2008 10:16 pm Post Subject:
Oh boy, here comes another one of my declarative statements....
Life Insurance death benefit proceeds are INCOME TAX FREE, IF paid to a natural person.
PERIOD. End of Story.
THAT being said if there was a collateral assignment on the policy to secure a loan that portion of the proceeds would be taxable.
For example, a business owner wants to borrow $1 million for business equipment expansion...bank says great but if you die we want our money...so we want an assignment on your $5 million life insurance policy to secure the loan in the event you die...business owner says fine...then he dies AFTER buying the new equipment.
Wife gets paid $4 million INCOME tax free.
The $1 million that was paid to the bank is taxable because that money bought and paid for BUSINESS EQUIPMENT that the business now owns free and clear.....that's my understanding of transfering an interest in a life insurance policy for value recieved. They view the $1 million dollars as being paid to the dead person then the dead person paid off his loan, hence, the $1 million is now TAXABLE INCOME.
Also Life Insurance proceeds are includable in your Estate for the determination of Federal Estate Taxes, this is a distinct and different taxation without respiration imposed by our Gubment when people die that is separate and apart from INCOME taxes which are taxation WITH respiration.
So whether you are breathing or NOT the Gubment wants your money that THEY print and circulate freely.
They just don't work for it.
Posted: Mon Jun 23, 2008 10:18 pm Post Subject:
Hey guys,
Generally speaking, life insurance taxes are not applicable on the policy proceeds. Factors that may come into play are; partial withdrawals or loans taken from the cash value or dividend accounts.
Chargerfan; unless the "added" amount you referred to is some sort of investment account, the death benefit is never taxable.
Then again, it all boils down to what the agent actually sold and how is was represented - or misrepresented, as the case may be. You all might remember that I've investigated fraud cases in Texas and CA where agents sold life insurance policies and made them part of a teacher's 403(b). This will change the plan's tax status.
I'm with Lori on this one; I need more information.
Mark
Posted: Mon Jun 23, 2008 10:50 pm Post Subject:
natural person.
as opposed to an artifical person perhaps? :wink:I'm pretty sure my mom's had some sort of dividend accounts, ON TOP OF or IN ADDITION TO, the life benefit...as I said she had to pay taxes on 'some'...actually not that much...some of the policys she got like 50k then had to pay taxes on say 8k (she actually got 58k as an example and only paid taxes on the 8k). The 50k was the life benefit and were not taxed.
Posted: Mon Jun 23, 2008 11:09 pm Post Subject:
How about a natural person with artificial intelligence? There HAS GOT to be a few of those running around.
Increases in a policy's death benefit due to cash value of dividend accumulations (this happened alot in the 80s and early 90s) will be taxable as ordinary income.
Happy to be natural,
Mark
Posted: Tue Jun 24, 2008 12:24 am Post Subject:
Increases in a policy's death benefit due to cash value of dividend accumulations (this happened alot in the 80s and early 90s) will be taxable as ordinary income.
Exactly and I'm just nearly sure this is what ''my'' mom's were...don't know about the OP..my step dad who passed away a year ago had been in the insurance field for well over thirty years... :wink:Add your comment