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How do I file the sale of a life insurance policy. I received a 1099 misc.
Received a 1099 misc for other income. I am not in any business.This was for the sell of a life insurance policy. The taxable portion has not been determine.I need to know how to file.
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The problem it creates for you is that in all likelihood your marginal (ordinary) income tax rate is higher than your capital gains rate, which actually might be as low as zero.
Have to speak to someone and explain the change - cite the information I provided in second answer with Public Law section.
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Additional citation and information
Section 13521(a) of the TCJA allows the seller of a policy to include all premiums paid in cost basis when calculating taxes due on a settlement transaction. It provides a "clarification of tax basis of life insurance contracts" (codified at Sec. 1016(a)(1)(B)) stating that when determining the basis of property, no adjustment is made "for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract."
Thus, sellers of life insurance are now afforded the same tax treatment as those who surrender their policy. Policy owners are now therefore more likely to sell an unwanted policy to a third party rather than simply surrendering or canceling the coverage.
For provenance of citation, go here:
https://www.congress.gov/115/plaws/publ97/PLAW-115publ97.htm
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The surrendering of an existing in-force life insurance policy back to the underwriting company or the sale of that same policy to a third-party, typically an investor who will hold the policy for the purposes of obtaining ultimately the death benefit, are taxable events. Since you chose the second approach to obtain value that had built up in your policy, this answer only covers that second alternative which is technically called a Life Settlement.
Before going further, @srhipps or any other reader, please be advised that the Tax Cuts and Jobs Act of 2017, overrode the previous guidance on the taxation of life settlements under IRS Revenue Ruling 2009-13.) That is to say, anything you might have understood about the Cost Basis calculation used in either a surrender or a life settlement done prior to 2017 is no longer valid.
The sale of a life insurance policy is a taxable event and the characterization of gains is determined under the guidelines set out in IRS Revenue Ruling 2009-13 by the Tax Cuts and Jobs Act (TCJA) of 2017.
The sale or surrendering of an in-force life insurance policy creates a tax liability because, from the IRS perspective, the policy has a calculable cost (the "Cost Basis"), as if it were an investment, and has obviously a sale value shown by the proceeds that you receive.
NOTE: "Term Life" policies do not build up a cash value so this question and answer is not relevant to term life policies.
Here is an example to illustrate the effect of taxation of a sale of an in-force policy that has built up cash value:
- Cash surrender value of $66,000 as stated by insurance company
- Total premiums paid of $58,000
- The policy has been owned for 10 years, has had no withdrawals, and has had no loans
- The individual insured is not terminally or chronically ill
- The policy is sold for $75,000 in a life settlement transaction
Now, since TCJA (2017) the determination of what is taxable and at what rate becomes more complex.Prior to TCJA (2017), the cost basis as determined in IRS Ruling 2009-13 would have been the premiums paid reduced by the insurance company’s record of the internal cost-of-insurance charges - as an example $10,000 so the calculation would have then been ($58,000 – $10,000 = $48,000).
However, TCJA repealed this interpretation, and instead the cost basis is simply the total premiums paid ($58,000).
Tax liability calculation: Proceeds of Sale less Cost Basis = $75,000 minus $58,000 = $17,000 taxable
- Cash surrender value of $66,000 less Total premiums paid of $58,000 = $8,000
- Form 1099-MISC Box 3 $8,000 taxed as ordinary income, not subject to employment taxes
- Form 1099-B Gain of $9,000 to be reported as a Long-Term investment gain.
Hope this helps to clear up any question.
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The seller has been incompetent in providing the filing. I'm not sure what you can do about it, except to research if there are other clients also so effected. There is no logic to the payment being a 1099-MISC Box 3 except that they had no idea what they should have done..
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