Life Insurance Payout

[Thad]

My client sister died last year. The client was the beneficiary of the life insurance policy. The beneficiary received a 1099-R, code 4. Federal taxes was withheld from the insurance policy payout. Is the proceeds from the life insurance taxable? According to Pub 17, payment from life insurance is usually not taxable. So, do we report the payout? The payout was put on her 2011 return, and it is being added to your overall income. If this money is non-taxable, then is it possible to report the life insurance proceeds, and then zero it out, otherwise, the government just may come looking for the beneficiary. Please kindly assist me with this nightmare...thanks.

[KathMorgan]

Life Insurance??

if she received a 1099R code 4 with federal withholding then this sounds more like an annuity or pension of some type as opposed to life insurance. Or it may be an employer paid life insurance. In any of these cases this income is taxable to the direct beneficiary. Have the client bring in any paperwork identifying the payment from the insurance company or call the agent.

Kathy

[Roberts]

Ask more questions and I'd agree, talk with the agent maybe. You aren't understanding the specifics and either the client doesn't know them or isn't telling you the truth (maybe they aren't telling you the truth because they were informed incorrectly).

I'd bet this is a payout on a tax deferred annuity that hadn't been annuitized yet.

[Burke]

That is correct. No 1099-R is issued for a life insurance policy as far as death benefits are concerned. They may get some interest on the death proceeds, but that would be on a 1099-INT. A 1099-R indicates it was an IRA or annuity in this case, not life insurance. Code 4 indicates payable at death and no 10% penalty for early withdrawal. It may be for the full amount, or it may be paid over years, the lifetime of the bene or deceased, depending on whether it was already in RMD status. IRA's and annuities do not get stepped-up basis, and are fully taxable when paid.