Life Insurance surrender for cash

[jaxt315]

We cashed in two small Universal Life policies this year with a total combined cash value of $22,860.  We are well within the 12% tax bracket.  The tax on the cash out portion ($14,238) shows as $3,195.  That's 22% of what is supposed to be Ordinary Income Charge (12%).  Help me understand why either TT is calculating wrong or why it is to be 22%.  Distribution Code "7" is selected on each 1099-R.

TIA

JDA

[JohnB5677]

You stated that it was a Universal life policy.  Is it possible that you overfunded it when you took it out.  If so, your policy has been classified as a MEC.  Withdrawals are generally taxed according to the rules applicable to annuities—cash disbursements are subject to income tax and possibly a 10% early-withdrawal penalty if you're under age 59½ at the time of the withdrawal.

[jaxt315]

Thanks for the response, but at the time of cash in my wife was 64.

Regardless, they were long term investments from the 1980's.  It seems it should only be taxed at 12%.

John

[HelenC12]

If it appears that you're being taxed at a higher rate than your 12% tax bracket, the two cashed in Universal Life policies income may be having an impact on other things in your tax return.  Possibilities include:

• You are subject to the Net Investment Income Tax of 3.8%. See What is Form 8960, Net Investment Income Tax?
•  You are subject to the Alternative Minimum Tax. See Why am I getting hit with the AMT (Alternative Minimum Tax)?
•  The higher income means other credits or deductions are being phased out or eliminated.

Compare your income tax return before you entered your cashed in policies versus your return after you entered your cashed in policies,  to see how it affected your tax return(s). 

[jaxt315]

HelenC12

I did as you suggested prior to asking my initial question. That was how I determined that were being asked to pay 22% rather than 12% on the difference in the taxes.

My thought was that perhaps TT was not calculating this correctly.

Thanks for your thoughts.

John

[JohnB5677 · Accepted solution]

This is just an idea, but you mentioned that your wife is 64.  Are either of you collecting Social Security.  

An additional $22,860 could put you at the point where the social security will start to be taxed.

If either of you do collect social security, please check Box 6b on your 1040.  Compare it with the $22,860 included, and again after you take it out.

If you have TurboTax Desktop you can simply go to the FORMS mode in the top right corner.

If you are using the Online version, please follow these steps.

1. On the menu bar on the left that shows.
   1. My Info
   2. Federal
   3. State
   4. Review
   5. File
2. Select Tax Tools
3. On the drop-down select Tools
4. On the popup menu
5. Select View Tax Summary
6. On the left sidebar
7. Select Preview my 1040.

Line 6b - Taxable Social Security

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