Can't see how a company could do backup withholding. A loan, by and of itself, is not a taxable event. The borrower always had the option to pay it back. So it could not have become a "deemed distribution" until it exceeded its underlying guaranteed cash value, at which time its value would be zero. That event would be determined by the policy provisions. A life insurance policy is a unilateral contract with only the provider required to honor its terms; the insured has no legal obligation to pay premiums or repay any loans. If he defaults, the coverage ends except as provided by the policy contract. I would guess this had to be a Single Pay variable life, or universal life contract in order to pay out such a large amount relative to the premiums paid in ($200K).
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Easy, from a technical standpoint. When the loan balance equals 72% of the cash value, treat (deem) the cash value as 100% distributed, with 28% remaining going to withholding. Very similar to withholding on the gross proceeds of sale of real estate. Essentially, it would be looking at the after-tax cash balance as the threshold which triggers a deemed distribution. While a loan might not be a taxable event, a deemed distribution IS a taxable event, I think we agree on that.Originally posted by Burke View Post
When I said "close the loophole", I implied that a new law would need to be enacted. A deemed distribution is whatever the law defines it to be. Maybe there would be exceptions, but it would be important to pause at the 72% threshold and force the taxpayer to make some kind of decision about how they are going to pay the tax, or why they won't ever have to, and I don't think "well, maybe I'll have Alzheimers someday" would be an acceptable reason. Meanwhile, until such loophole is closed, on some occasions the rest of the taxpayers will be left holding the bag."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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