1099R for Surrendered Life Insurance Policy in Pennsylvania

[Ziggy23]

I surrendered a life insurance policy that I had through my employer, premiums paid with after-tax money. The surrender value is less than the premiums paid. In Turbotax, if I enter the PA distribution category as life insurance, Turbotax calculates the distribution as being taxable. Since the proceeds are less than the premiums paid, shouldn't it be nontaxable? Box 2a of the 1099R is blank, so I assumed it was not taxable at the federal or state level. Is PA different?

[MinhT1 · Accepted solution]

If the surrender value of your life insurance policy is less than the total premiums you paid with after-tax dollars, then it is not taxable.

When entering your form 1099-R, you can enter the total premiums paid in box 5, even if the payer left it blank, provided you have documentation to justify the amount.

The same applies to your state PA return.

[Ziggy23]

Any thoughts on what category to enter the 1099R under in Turbotax under the PA state question?

[DianeW777]

On your Pennsylvania (PA) return you would have paid tax on all the money you used to purchase the life insurance policy and you did not have any earnings above that cost basis. This should not be taxable to PA. Be sure you did not put any state amount in the 1099-R.

1. In your PA return you will reach the PA Retirement Distributions screen
2. When you reach the screen 'What type of income do you have from PA?' Click the dropdown in 'State Type Code' 
3. Select 'I'm eligible; Plan's eligible, no PA tax'