Do I pay tax on a partial life insurance withdrawal?

[hmoravy]

$25,000.00

[ToddL99]

No, you do not need to report or pay tax on the partial withdrawal of cash value from your life insurance policy. 

Those funds would be considered a return of non-deductible premiums you paid in to the policy, partly for insurance coverage and partly as an investment.A policy withdrawal, on the other hand, is considered to be a partial surrender of the net cash value.

If, however, some portion of the cash payout included previously non-taxed interest income, then the payer would issue you a 1099-INT for that amount - that interest income would be taxable.

[dmertz]

Insurance companies generally do not issue Forms 1099-R for distributions from insurance policies unless at least some portion of the distribution is taxable.  If you received a Form 1099-R and box 2b Taxable amount not determined is not marked on the form, box 2a shows the taxable amount.  If the value of the insurance policy was greater than the sum of the premiums that you paid into the policy, some portion of the distribution is taxable.   

[WJordelCPA]

When I completed my return and recorded the 1099-R for the insurance distribution, I recorded the total distribution and the taxable portion from the 1099-R, but appears Turbo tax software is taxing the total amount.  How do I fix the return?

[dmertz]

@WJordelCPA , does the Form 1099-R have the nontaxable amount in box 5?

Is box 2a Taxable amount not determined marked?

What is the code in box 7?

On Form 1040 line 5b, are you seeing the entire gross amount being included or only the taxable amount?

Be aware that the entire gross amount is considered to be income and the TurboTax summary will show the entire gross amount as income required to be documented on your tax return, but only part of it is taxable income.

[WJordelCPA]

1. gross distribution 10,914

2a. Taxable amount 3,193

2b. Total distrib. checked

4. Fed w-h 479

5. ins premiums 7,721; 7. distrib code 7;14. State withheld 136

[WJordelCPA]

I figured out the problem, I had accidentally checked the IRA-SEP-Simple box on Turbo Tax box 7 and it should not have been checked.  Once corrected it reported the 1099-R correctly.  Sorry slip of a finger.