Cash surrender of life insurance policy with loan interest deducted from payout

[asmtoner]

We surrendered life insurance policies that had a cash value with a loan against them.  We received a 1099-R for each with a much higher amount than the checks we received.  Can we deduct the loan principal and/or interest from the taxes we owe?  example  53000 cash value 16000 loan principal 30000 loan interest so we received a check for 7000, however the 1099-R is for the full 53000 even though we only received 7000 as what we would consider as income.  Thanks for helping with this.

[DavidD66 · Accepted solution]

No, you cannot deduct the principal or the interest from the taxes you owe.  When you surrender the entire cash value of the policy, it becomes taxable income.  The loan amount and related interest reduces the amount of the cash you received, as it was basically a distribution of the cash value prior to surrender.  Once the policy is surrendered, that amount becomes taxable.