I changed my life insurance policy from one company to another in 2023.
Steps:
1. withdrew $25,000 as a partial surrender. my cost basis was $31,130, so everything showed this would be non taxable.
2. Did a 1035 exchange to the new life insurance for the remaining $40,493, remaining cost basis was 6,130.
Old account was closed, new policy was created.
when i got my 1099-Rs, they show this:
1, Box 1 - 25,000, Box 2a 25,000 , Box 7 codes are 7D. Nothing anywhere else
2. Box 1 40,493, box 2a 0.00, Total distribution checked, Box 5 6,130, Box 7 Codes 6
After questioning my old insurance company multiple times about why the 25,000 is showing as taxable, their response is basically this:
Since i did both the partial surrender (25,000) and the 1035 exchange in the same year, that makes the 25,000 taxable. This is not based on an actual tax code, but a 'Non Authoritative guidance'.
So my question is , is this correct? is it taxable now? And if it is, shouldn't the cost basis have stayed at 31,130? That makes a difference on any future withdrawals i may need to make and whether the money is taxable.
