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Do I have to pay tax on my life insurance interest?
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| Interest that you receive or that is credited to your account and can be withdrawn is
taxable income and must be reported on your tax return. Taxable interest
on your tax return includes interest you receive from bank accounts, loans
you make to others, and interest from most other sources. The interest on
your life insurance dividends is taxable in the tax year it is credited to your account
and must be reported on your tax return if you can
withdraw it in that tax year. However, if you can only withdraw the life
insurance interest on the anniversary date of
the life insurance policy (or other specified date), the life insurance interest is taxable
and must be reported on your tax return in the
tax year in which that
date occurs.
Life
insurance dividends are not taxable and you should not report them on your tax return.
If life insurance death benefits are paid to you in a lump sum or other than at regular intervals,
include the life insurance death benefits in your gross income on your tax
return only to the extent the life insurance death benefits are more than the amount payable
to you at the time of the insured person’s death. In other words, if the
life insurance death
benefit is $50,000 and you receive $50,100 the $100.00 is taxable interest
and you must report it on your tax return. The $50,000 in life insurance death
benefits is generally tax free and you do not report it on your tax
return. In other words, if the
life insurance death benefit is $50,000 and
you receive $50,000, there is no taxable interest and thus nothing to report
on your tax return.
If you receive life insurance proceeds in installments you can exclude a part of each
life insurance installment from your taxable income on your tax return because it includes both
life insurance death benefits and life insurance interest. Divide the
life insurance death benefits of the policy by the number of years payments are to be received. That's the
amount that is tax free each year.
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| You must give the payer of your interest income your correct social security number.
If you do not, you may be subject to a tax penalty and to back-up tax withholding. For more
information see "What is Form
W-9 and backup tax withholding?" You should receive
Form 1099-INT for interest income and an Form
1099-OID for original issue discount from any paying institutions. You may receive a
similar or substitute tax statement from each payer. Payers of interest of $10 or more are
required to furnish you and the IRS with this tax information. This tax information is also usually included
on your year-end account statement. Even if you do not receive a tax statement or
Form 1099
you are still responsible for reporting all taxable interest income on your tax return. The IRS is notified
of all interest paid by financial institutions on magnetic media. If you do not include
your interest income on your tax return the IRS will know when their computer system
matches your tax return to the tax information provided by payers. You will then be notified,
usually by mail, of the amount of additional tax, interest, and penalties that you
owe.
Interest of $1,500 or Less
If your taxable interest income is $1,500 or less, you need to show that
taxable income on Line 8a of Form 1040
or Form 1040A, or
Line 2 of Form 1040EZ.
Interest of More Than
$1,500
If your taxable interest income is more than $1,500 you must file Form 1040 or
Form 1040A.
You cannot file Form 1040EZ. Start by showing your interest income on Form 1040, Schedule B, or on
Schedule 1 of
Form
1040A. FolIow the instructions and this will carry over the information to
Line 8a
of Form 1040 or Form 1040A.
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Related tax
information about life insurance interest |
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Are life insurance dividends taxable?
Are life insurance death benefits taxable?
Income Related Questions and Answers |
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IRS publications about life insurance interest:
For more information about life insurance interest received in installments refer to
IRS Publication 525, Taxable and
Nontaxable Income. If you need additional information about interest refer to
IRS Publication 550, Investment
Income and Expenses. Also see
IRS Publication
17, Your Federal Income Tax. |
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Ask Julian Block your IRS and tax questions! |
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If you can't find the answer to your IRS or tax question in our
web you can call former IRS Special Agent and one of the country's foremost tax attorneys, nationally syndicated columnist ("The Tax
Adviser") Julian Block. Julian is also the tax Editor of Mutual Funds Magazine, America's premier investment magazine. To
call Julian for a tax consultation click
here. |
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