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doldidng82
Returning Member

accelerated death benefit taxable from life insurance

Hi Team,

 

I got accelerated death benefit payout from my life insurance company last year due to cancer surgery and they sent me 1099-R form as follows.

1. Gross distribution: $xxx.xx (accelerated death benefit amount according to the policy plus "account value")

2a. Taxable amount: blank

2b taxable amount not determined: checked

7. distribution code: 3

 

What I mean by "account value" is this is one of those types of life insurance where your premium amount is being worked as an investment with some compound interest. 

 

As far as I understand life insurance payouts due to critical illness or terminally ill are not taxable according to the IRS. For some reason, when I entered this 1099-R form during it looks like TurboTax making whole amount taxable and my due amount is shooting up through the roof.

For experiment, when I unchecked 2b and left it blank, my both federal and state refund amount got back to normal as if I don't have this form submitted.

 

I also talked with local CPAs long time ago, they told me death benefit payouts by Insurance due to critical illness shouldn't be taxable, although I did not go over details with them.

 

Can you please advise here?

 

8 Replies
GloriaL
Expert Alumni

accelerated death benefit taxable from life insurance

Yes, you are correct. Accelerated death benefits paid to a terminally ill insured (with a physician’s certificate showing a reasonable expectation of death within 24 months) is not taxable. Accelerated death benefits used for a chronically ill insured’s long-term care services are also not taxable. Amounts in excess of the policy holder’s total investment are taxable.

 

The 1099-R that you received is correct.

To enter this:

  1. Open Turbo Tax.
  2. In the Search box type 1099-R.
  3. Click on Jump to.
  4. Enter your 1099-R as it appears on your form, in Box 2 enter zero.
  5. Continue to answer through the questions.

 

doldidng82
Returning Member

accelerated death benefit taxable from life insurance

Hi Expert,

 

Thanks for your quick reply. My case was the cancer surgery and I got the payment technically for critical illness  not terminally ill. I guess it falls into chronically ill category because I will be needing long-term care services anyway.

 

By the way, are you allowed to enter "0" in box 2a when it is just blank?

 

CatinaT1
Employee Tax Expert

accelerated death benefit taxable from life insurance

If there is a 0 in box 2, enter the 0.  If it is blank, leave it blank.  This is important.  If it is blank, it should have the box marked for taxable amount not determined.  If you enter 0, this would mean the taxable amount is known and is 0.  

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doldidng82
Returning Member

accelerated death benefit taxable from life insurance

CatinaT1,

 

Thanks for your reply. But I think GloriaL is right.

I found this from IRS site: https://www.irs.gov/pub/irs-pdf/f1099r.pdf

on Page 6,

"

Box 2b. If the first box is checked, the payer was unable to determine the taxable amount and box 2a should be blank, except for an IRA. It’s your responsibility to determine the taxable amount. If the second box is checked, the distribution was a total distribution that closed out your account.

"

 

I think I should put 0 on box 2a and move on.

CatinaT1
Employee Tax Expert

accelerated death benefit taxable from life insurance

I would be careful with doing that.  The IRS receives the same form you do and if it is reported differently, it could trigger a response from the IRS.  You may want to double check your insurance policy and any riders you have that address an Accelerated Death Benefit.  They are not always tax free.  The disbursement code the insurance company used is a 3, which if for disability.  There are different and specific requirements for an Accelerated Death Benefit and I would expect if you qualified for a non-taxable distribution your insurance company would have issued the 1099R marked as non-taxable.

 

Be sure if you enter something different than what is specifically listed on your 1099R that you have the documents to back up the fact that it is non-taxable.  

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doldidng82
Returning Member

accelerated death benefit taxable from life insurance

CatinaT1,

 

Thanks again for your response with details. I actually spoke with my insurance company and they asked me to ask to my local tax advisor even though they are the ones sent me this form. It actually makes sense to me because Insurance companies shouldn't decide taxable amount but IRS.

According to IRS, it is clear that It is the taxpayer's responsibility to determine the amount to be taxed in this case. It is the first time for me to receive this form and new concept to me where you put the amount by yourself and have the supporting documents backed up if anything come up later.

 

SirHenry81
Returning Member

accelerated death benefit taxable from life insurance

Doldidng82,

 

what was the outcome of your taxation situation? Any letters or forms sent from IRS? Did your tax complete with no issues when entering ‘0’ in question 2a? I’m in the same situation as you. Any feedback is appreciated, thanks.

doldidng82
Returning Member

accelerated death benefit taxable from life insurance

Hi,

 

I filed my taxes with '0' entered after I got the professional advise from my CPA. Even though I didn't get the physician’s certificate showing a reasonable expectation of death within 24 months my CPA suggested to move on with '0' entered because you had a cancer and you should be continued to be monitored for the rest of your life. Just in case it will trigger the audit, I would try to keep all medical records.

 

Hopefully it helps and I hope the best with your health.

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