accelerated death benefit taxable from life insurance

Forum|Forum|5 years ago
January 31, 2021
1 reply
3 views

Hi Team,

I got accelerated death benefit payout from my life insurance company last year due to cancer surgery and they sent me 1099-R form as follows.

1. Gross distribution: $xxx.xx (accelerated death benefit amount according to the policy plus "account value")

2a. Taxable amount: blank

2b taxable amount not determined: checked

7. distribution code: 3

What I mean by "account value" is this is one of those types of life insurance where your premium amount is being worked as an investment with some compound interest.

As far as I understand life insurance payouts due to critical illness or terminally ill are not taxable according to the IRS. For some reason, when I entered this 1099-R form during it looks like TurboTax making whole amount taxable and my due amount is shooting up through the roof.

For experiment, when I unchecked 2b and left it blank, my both federal and state refund amount got back to normal as if I don't have this form submitted.

I also talked with local CPAs long time ago, they told me death benefit payouts by Insurance due to critical illness shouldn't be taxable, although I did not go over details with them.

Can you please advise here?

TurboTax Free Edition Online

GloriaL

Level 7

Yes, you are correct. Accelerated death benefits paid to a terminally ill insured (with a physician’s certificate showing a reasonable expectation of death within 24 months) is not taxable. Accelerated death benefits used for a chronically ill insured’s long-term care services are also not taxable. Amounts in excess of the policy holder’s total investment are taxable.

The 1099-R that you received is correct.

To enter this:

Open Turbo Tax.
In the Search box type 1099-R.
Click on Jump to.
Enter your 1099-R as it appears on your form, in Box 2 enter zero.
Continue to answer through the questions.

doldidng82Author

Level 2

Hi Expert,

Thanks for your quick reply. My case was the cancer surgery and I got the payment technically for critical illness not terminally ill. I guess it falls into chronically ill category because I will be needing long-term care services anyway.

By the way, are you allowed to enter "0" in box 2a when it is just blank?

CatinaT1

Level 15

If there is a 0 in box 2, enter the 0. If it is blank, leave it blank. This is important. If it is blank, it should have the box marked for taxable amount not determined. If you enter 0, this would mean the taxable amount is known and is 0.

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