Taxable income on certain death benefit payouts?

[adam1961]

What is the name of your state (only U.S. law)? PA

My father passed away in Sept. 2014. I received two separate death benefit payouts from two separate policies. One was from a variable appreciable life insurance policy with a face value of $60,000.00, but had grown to nearly $97,000.00. Am I responsible for paying tax (federal and state) on the amount over the face value of $60,000.00?

I was also beneficiary on a Variable Investment Annuity policy. Initial investment was $3700.00, but is now worth nearly $30,000.00. Am I responsible for any taxes (state and federal) on that above the initial $3700?

Thank you in advance for advice and for your help.

 

[davew128]

Life insurance death benefits aren't taxable.

 

[anteater]

And the gain on a non-qualified annuity will be taxable as ordinary income.

 

[LdiJ]

And the gain on a non-qualified annuity will be taxable as ordinary income.

Unless it got a stepped up basis as of the date of death. If its non-qualified its not a retirement vehicle, therefore it would be an investment vehicle.

 

[anteater]

Unless it got a stepped up basis as of the date of death. If its non-qualified its not a retirement vehicle, therefore it would be an investment vehicle.

Annuities don't receive a basis step up - one of their downsides.

 

[davew128]

Unless it got a stepped up basis as of the date of death. If its non-qualified its not a retirement vehicle, therefore it would be an investment vehicle.

As Anteater stated, it doesn't get a basis adjustment. In fact annuities are specifically listed in 1014 as being an exception to receiving a basis adjustment.

 

[adam1961]

Thank you for the replies.

So it's pretty clear I will be responsible for taxes on the annuity plan payout, but still not clear about the life insurance payoff and taxes: am I responsible for taxes on everything above the $60,000.00 fave value of the policy?

 

[adam1961]

sorry...meant "face" not "fave" in the last post.

 

[LdiJ]

Thank you for the replies.

So it's pretty clear I will be responsible for taxes on the annuity plan payout, but still not clear about the life insurance payoff and taxes: am I responsible for taxes on everything above the $60,000.00 fave value of the policy?

Life insurance proceed are not taxable.

 

[davew128]

Thank you for the replies.

So it's pretty clear I will be responsible for taxes on the annuity plan payout, but still not clear about the life insurance payoff and taxes: am I responsible for taxes on everything above the $60,000.00 fave value of the policy?

Life insurance death benefits aren't taxable.

Not sure what was unclear about the reply.

 

[adam1961]

First, I apologize for making you have to post twice concerning confirmation/clarity on my original question.

Secondly, since this is the first time I am the recipient of a life insurance policy payout, and I have never filed more than a simple tax return, it's all new to me and I guess I'm just being overly cautious about what is and isn't taxable.

Through much research on tax related web sites, I still wasn't quite clear if the gains portion on the life insurance policy was taxable. Getting the total $97,000.00 tax free just seemed like I might have been missing something.

But rest assured, I am now clear: there will be no taxes.

Thank you.

 

[davew128]

Internal Revenue Code Section 101

(a) Proceeds of life insurance contracts payable by reason of death
(1) General rule
Except as otherwise provided in paragraph (2), subsection (d),subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.

While there is an exception, it never applies in the context of an individual simply named as a beneficiary to the policy. Beyond that I cannot fathom what tax research you could have possibly seen that would have told you otherwise.

 

[adam1961]

Called IRS today. Waited one hour. Spoke to "income" specialist. Explained policy payout. Was told the gains above face value are taxable income. Maybe they were right, maybe they were wrong, maybe they misunderstood me. All I know is I won't be doing my own taxes this year.

Thanks for all the advice. Time to move on.

 

[davew128]

I'm sorry the fact that 2 professionals gave you the answer AND quoted the law to you in bold wasn't sufficient to give peace of mind that you had to call the IRS and predictably get an incorrect answer.

The annuity is income, the life insurance is not. WHAT IS SO HARD TO UNDERSTAND???

 

[adam1961]

I'm sorry the fact that 2 professionals gave you the answer AND quoted the law to you in bold wasn't sufficient to give peace of mind that you had to call the IRS and predictably get an incorrect answer.

The annuity is income, the life insurance is not. WHAT IS SO HARD TO UNDERSTAND???

Wow! I got you to use "ANGRY CAPS"!!! The only thing that could have been more impressive is if you would have used bold again, but I must say I'm still honored.

Take care, pop a Xanax, relax a little, and have a great 2015.