1099R for cash out of life insurance

[tpepowell]

In processing the 1099R for cash out of a variable Universal Life Insurance policy, TT is not prompting me for funds paid in excess of the premiums.  TT is only asking about Annuity and Pension payouts which is not what this 1099R was issued for.  How can I get the insurance policy cost basis information input to calculate the taxable portion of the payout?  Note that box 2a is blank and 2b is checked for taxable amount not determined.  The issuer of the 1099R told me that my tax professional needs to determine how much of the policy cash-out is taxable.  Where do I go from here?

[DavidD66]

What is the code in Box 7 of your 1099-R?  Are there any other boxes populated (other than state)?

[tpepowell]

There are two codes in box 7 they are 7 and D.

I think that I paid 15K in excess of premiums into the account from after tax funds, is that 15K worth of the 38K cash-out non-taxable?

[tpepowell]

other than box 7, 2b total distribution is checked.  No other box has information.

[DavidD66 · Accepted solution]

In my opinion, your insurance company should have determined the taxable amount and included it in Box 2a.  The only way I can figure out how to report the 1099-R, and get the correct taxable amount to flow to your Form 1040 is to calculate it and enter it in box 2a of your 1099-R entry.  This will result in the correct taxable amount flowing to your Form 1040, line 4b.

[norwen]

I had the same situation. Taxable amount not determinable; premiums paid for years and years on a post tax basis (payments did not reduce my taxable income). Distribution codes 7 and D. On top of that, this contract was transferred to my wife from her mom and we got tired of making quarterly premium payments for a small life insurance amount. Whole life policy--they stink! I'd like to say the taxable amount is the proceeds less the total premiums paid against the policy; not dependent on whether the premium was paid by my mother in law or by us. Anyone know any different?

[JohnB5677]

Any money received that exceeds your cost basis in the policy will be counted as ordinary taxable income.

You will have to determine the total amount of premiums that were paid.

As you go through the questions "Describe the Taxable Amount"

NO a different amount is taxable

You will use the Simplified Rule to enter the taxable amount

• Annuity date is the start date as best as you can determine
• Plan cost is the premiums up to 2019
• Months in 2019 is simply the # of months you paid premiums
• [Continue]

NO, The annuity only covers one person

Answer age question

Taxable amount will have been calculated

[tpepowell]

I followed the advice of DavidD66 and I have already e-filed my federal and state returns.  Do I need to file amended returns?

I am sure that I listed the proceeds in excess of my basis correctly so that the correct tax owed was calculated.  Please advise.

[norwen]

I should also have said box "Total distribution" in Box 2b is checked. Recap-Box 2b "Taxable amt not determined" is also checked. In Box 7, distribution codes are 7 and D ("Normal distribution" and "Annuity payments from nonqualified annuities that may be subject to tax under Section 1411"). Total distribution was $6,489; premiums paid were at least 6,279. TT is telling me we must use the General Rule.

[tpepowell]

I already efiled using the advice to write in the taxable amount that I calculated when prompted for an amount on box 2a, note that box 2a is blank on the 1099. I did not go down the route of using the simplified method as you describe.  Do I need to file an amended return?

[Carl]

Generally, when you cash out a whole life policy, the amount reported in box 1 of the 1099-R will be less than the amount you were actually paid. if so, then more than likely the entire amount in box 1 is taxable.

On a payout of a whole life policy, the payout does not include your premium payments (of course it doesn't). It includes your "investment portion" of the premium you paid, and the earnings on that investment portion. The investment portion you already paid taxes on in the year you paid/invested it. But the earnings become taxable in the tax year you cash out.

So if box 1 is less (probably significantly less) than the total payout, that's a good indicator that the entire amount reported in box 1 is earnings only, and is therefore fully taxable.