Does TurboTax record distribution when a life insurance contract is cashed in?

[stuart-td-anderson]

I cashed in a life insurance contract; the gross distribution exceeds the premiums paid. When using the TurboTax 1099-R function, it pushes the transaction to a Schedule 1 (Form 1040), which is not in accordance w/ IRS guidance.

[ReneV4]

It appears that the distribution may have been coded incorrectly, leading the transaction to appear on your Schedule 1, rather than Line 5a and Line 5b of your Form 1040. To properly record your Form 1099-R that was for a cashed in life insurance contract, do the following:

First, I recommend deleting your Form 1099-R and the IRA Information Worksheet, before re-entering the 1099-R: 

1. In TurboTax Desktop, go to Forms Mode, Click on Form 1099-R and select Delete Form at the bottom left, then click IRA Info Wks and Delete Form
2. In TurboTax Online, go to Tax Tools on the right hand panel inside of TurboTax
3. Click on the down arrow and scroll down to Tools
4. Click on Tools and select Delete a form from the menu items that appear in the Tool Center
5. Click on the trash can icon to the right of IRA Information Worksheet and then Form 1099-R

Next, re-enter the Form 1099-R:

1. Go to Income on the left panel within your TurboTax account
2. Scroll down to Retirement Plans and Social Security and click on the down arrow to the right
3. Click Start to the right of IRA, 401(k), Pension Plan Withdrawals (1099-R)
4. Click the +Add a 1099-R box 
5. Click the "Enter a different way" box
6. Click the "Type it in myself" box
7. Click on the box that pertains to your type of 1099-R (typically the first box), Continue
8. Next, you will see, "Enter your 1099-R provider's info", complete that, then Continue
9. Next, you will see "Enter your 1099-R details from _". Enter the information from the original Form 1099-R that you received
10. Ensure the details from your Form 1099-R are correct, including any amount in Box 5
11. Ensure the correct distribution Code was used in Box 7, and that the IRA/SEP/SIMPLE box is unchecked, then Continue
12. On the, "What kind of retirement plan do you have?" screen, select Non-qualified plan, Continue

To verify the information is correct:

1. On the left panel, click on the down arrow to open more options
2. You may have to scroll down a little to view the Tools option below
3. Click on Tools, then View Tax Summary from Tools Center (Usually the first option)
4. Select Preview my 1040 from the left hand panel, located above Tax tools
5. Scroll down to Line 5a to confirm the Box 1 amount is there, and the taxable gain amount should appear on Line 5b

[stuart-td-anderson]

Response does not work.  I apologize, should have stated “… when using TurboTax DIY Free Edition.”  

On my initial attempt to enter the transaction manually,  or upload the 1099-R, the results are the same: the process pushes the income to the 1040 Schedule 1, thus requiring an expensive upgrade to TurboTax in order to process this transaction.  

On my 4th(?) attempt, deleting documents and entries, then reloading, the result is the same: a Schedule 1 display of the income, and requirement for TurboTax upgrade to process this transaction

[MonikaK1]

TurboTax Free Edition generally does not support reporting nonqualified retirement plan distributions or life insurance surrenders (1099-R with specific codes), typically requiring an upgrade to a paid version such as Deluxe. These distributions are often treated as taxable income, reclassified to Schedule 1, and in cases of policy surrender (Code D/1099-R), it is not considered a "simple" return.

Please see this help article for more information.

@stuart-td-anderson