For my unique situation where i surrendered my life insurance policy and reading various other insurance company sources, Dividends are not taxable and should not reduce basis. The dividends were used to reduce premium payments and earlier i think they were used to purchase paid -up insurance.
I think my insurance company sent me an incorrect 1099-R because they subtracted Total Dividends from my Total Premium Payments to arrive at a very low Basis leading to a very high Taxable Amount which essentially comes out to taxing my Dividends.
Insurance references on the internet say that dividends have no effect on the basis and are a return of premiums and are not taxable. What is your opinion on this ?
Thank you.
