Surrender Cash Value Life Insurance

[sdaudino]

During 2023 I surrendered a cash-value life insurance policy. I received a 1099-R with Box 7 showing 1D. I bought the policy with after-tax money. The policy was not funded by nor part of a retirement account. It appears that if I enter 1D in box 7 on turbo tax I am seeing an additional tax of 10% (which I equate to an early withdrawal penalty). My gut tells me to only enter D in box 7 for turbo tax. Your assistance is appreciated.

Thank you

[dmertz]

The Form 1099-R must be entered as received.  The 1 in box 7 indicates that the amount in box 2a is subject to an early-distribution penalty because you were under age 59½ at the time of the distribution.  Box 5 should show the amount of your investment in the contract and box 2a should show only taxable gains, the amount in box 1 minus the amount in box 5 (but not less than zero).

[DianeW777]

Yes, the code 1 would tell TurboTax that a penalty should be applied. However, if there is no taxable amount in Box 2a, or the box is checked for 2b that a taxable amount is not determined, then you will need to enter the correct taxable amount in Box 2a.  

• Box 2a is the determining factor for TurboTax
• D—Annuity payments from nonqualified annuities that may be subject to tax under section 1411.

Penalty is only based on the taxable amount.  If all of the surrender was your own contributions then none should be taxable.  However, if you did receive any earnings above your own contributions that amount would be taxable and penalized. Check box 5 for your contributions in the plan as indicated by dmertz.

[sdaudino]

Thank you! It hurts, but thank you. Basically the life insurance policy that I bought in 2010 turned into a MEC after 7 years because I fully funded it up front. Would have been nice for someone from the life insurance company explaining that to me and other options - like only withdrawing my premiums - before I surrendered it entirely.