Your life insurance policy’s cash surrender value may be taxable. Any amount you received that is more than your policy’s basis, or the amount you paid in premiums, is taxable income. In addition, if you had an outstanding loan, that amount could be taxable. You should have received a final statement from the insurance company that shows you what you basis in the policy was, any outstanding loans, etc. You will need that to determine your taxable amount.
Typically, insurance companies do not file Form 1099-R (they are not required) to report the surrender of a life insurance policy if it is reasonable to believe that none of the payment is taxable income. Some or all of the amount reported on Form 1099-R is probably taxable. You are safe to assume that the amounts you received from the surrender of the smaller policies for which you did not receive a Form 1099-R is not taxable.
Once you know what your cost basis is, you can determine the amount, if any, of your proceeds is taxable. To report your Form 1099-R, you will enter in the Retirement Income Section. From the Tax Home:
- Select Income
- Scroll down to "IRA, 401(k) , Pension Plan Withdrawals (1099-R)"
- Click on the pencil icon
- Answer Yes to indicate you received a 1099-R
- On the Let's import your tax info" screen, Scroll down and click on "Change how i enter my form"
- Click on the box with "Type it in myself"
- Select "Financial Institution or other provider (1099-R)" then Continue
- Enter your 1099-R
Once you know your cost basis and have determined how much of the amount in Box 1 is taxable, enter that amount in Box 2. If none of it is taxable, enter $0.00
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