Life insurance payout

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My husband and I file together. His mother passed away last year. She had life insurance and he and his brother were the beneficiaries. He received a 1099-INT that stated interest income which I have included in the taxes we are filing. However I don't know what to do regarding the payout from the life insurance. Is that included as part of income or what? Of course it's not something that has a W2 and we have never had to deal with this before so I don't know what to do

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MaryK1Answer

Level 11

No, a life insurance payout is not taxable income- it is the contracted amount for paying the premiums. The INT represents the interest the payout made from the date of death to disbursement of the check. Sorry for your loss.

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MaryK1Answer

Level 11

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boblsr

Level 2

My father passed away in 2019 and I was named beneficiary on his life insurance policy. I received a 1099 Int for the interest on his policy which I included on my tax return. However I also received a 1099 Misc for the payout. If I enter that it will show up as taxable income. I thought this is not taxable. Do I enter this or not.

BillM223

Level 15

@boblsr

Please see my note above.

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BillM223

Level 15

As you know, life insurance benefits are normally not taxable if paid directly to you (as opposed to through an annuity).

As the IRS says: "Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them."

See IRS response to the question: "Do I report proceeds paid under a life insurance contract as taxable income?"

However, because this income was reported on a 1099-MISC, the IRS now has a copy of it. If you don't report the income, an IRS computer may notice this and send you a letter.

I would add an entry in Other Income (Less Common Income, Miscellaneous Income - anyplace you can add a dollar amount and a description) the negative amount of the payout with the description "nontaxable life ins proceeds backed out".

The net effect should be to nullify the benefit on your return, so that you are not taxed on it.

Might the IRS question this, too? Sure, but you have the documentation of the policy and the check, and you can reply to any letter that according to their own instructions, you should not report this as taxable income.

My guess is that if you report it the way I suggested (as opposed to just not entering the 1099-MISC at all), that you are less likely to get that letter.

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