Interest on Life Ins. Proceeds / Question

[bbrownatl]

Ok, the brain cells are not all firing at once. I just need a mental check. I have a new client whose husband passed away. After a period of time, she received a payout for life insurance. In addition, she received interest as well for the period from the date of death to the issuance of the insurance proceeds. This interest is taxable, right? The taxpayer received a 1099-INT for about $32K. Of course, no estimated tax payments on this payout. Again, just want to double check because, this taxpayer is going to have a nice hefty payment to make.

Let me know if I’m missing something.

Thanks,
Brian

[Peachie]

I would think so

This interest is taxable, right? The taxpayer received a 1099-INT for about $32K. Of course, no estimated tax payments on this payout. Again, just want to double check because, this taxpayer is going to have a nice hefty payment to make.

Let me know if I’m missing something.

Thanks,
Brian

I had a new client this year whose wife passed last year. Received 1099-INT-went right on the tax return. It's income--it's taxable.

Peachie

[Nashville]

Possible Break

There is a possible break that your expertise as a tax preparer may bring some relief from this.

If I understand your post, the amount of interest earned by this life insurance policy is $32,000. This seems abnormally high, unless the face value of the policy was in the millions. Are we sure this is not earnings of an annuity instead? The interest would be taxable nonetheless, but it might be helpful to know.

Other than that, if there is some way to claim the interest in the year of death instead of in the succeeding year, the widow would have a MFJ rate instead of S rate, plus a much higher standard deduction. If this huge amount of interest is attributable to a single life insurance policy, the interest may have been earned in two different ways:

1) The excess of earnings over premiums in the buildup of cash value.
2) Earnings on a large cash value after death.

If it is the latter, this would be earnings of the estate. The former would most likely be considered earnings in respect of a decedent.

I think all of this is going to be taxable either on a Joint Return, Single Return, or Estate return. It is a matter of knowing what the interest represents.