topic Same thing-we settled with a mediator because trustee can... in Retirement tax questions

Is settlement from a life insurance lawsuit taxable?

noclue1 — Sat, 01 Jun 2019 01:14:57 GMT

I recently settled a lawsuit over my mothers life insurance. The insurance would not have been taxable so I assume the settlement of it is not taxable as well.

Assuming nothing. It depends on what the payment was for....

Carl — Sat, 01 Jun 2019 01:14:59 GMT

Assuming nothing. It depends on what the payment was for.
You're right in that life insurance is not taxable or reportable to the *beneficiary recipient" named on the policy. That's because life insurance is a "product" paid for with after tax dollars.
However, what was the settlement for? Was it for payout of the product bought and paid for? Or something else?

If you don't get a form 1099-Misc, for the payout, you ar...

Hal_Al — Sat, 01 Jun 2019 01:15:01 GMT

If you don't get a form 1099-Misc, for the payout, you are probably safe in not reporting it. But, even if you do get a 1099, it may not be taxable.

The insurance company did not want to pay out and we sued...

noclue1 — Sat, 01 Jun 2019 01:15:02 GMT

The insurance company did not want to pay out and we sued for fiduciary failure and settled with a mediator

Same thing-we settled with a mediator because trustee can...

duncansuechros — Sat, 01 Jun 2019 01:15:04 GMT

Same thing-we settled with a mediator because trustee cancelled her policy without informing us. The insurance company sent us a 1099 with proceeds reported only in box 14 of 1099 as attorneys fees. What do we do with that 1099?

Assuming the payment was not more than the premiums you p...

Opus 17 — Sat, 01 Jun 2019 01:15:07 GMT

Assuming the payment was not more than the premiums you paid over the years, then the money is not taxable. I would probably leave the 1099 off your return. You may get a letter from the IRS. In your answer you will give details of the situation and why the money is not taxable income. Or, leave it off your tax return and file by mail instead of e-filing. Attach a copy of the 1099 and a written statement explaining why the income is not taxable.

Be careful here. While the base policy amount is not taxa...

Carl — Sat, 01 Jun 2019 01:15:09 GMT

Be careful here. While the base policy amount is not taxable or reportable on any tax return, any earnings that may have accumulated on that amount, are taxable income to the beneficiary recipient. If that's the case, it's customary for those taxable earnings only, to be reported to you on a 1099-R and not a 1099-MISC.
For example, if the base policy coverage is for $100,000 and you get a check for $100,500, if that $500 is interest that accumulated "after" the passing of the insured, then it's taxable income to the beneficiary recipient. The 1099-R would only have $500 in box 1 then.

You are correct, life insurance proceeds are not taxable....

Opus 17 — Sat, 01 Jun 2019 01:15:11 GMT

You are correct, life insurance proceeds are not taxable. However, if the settlement includes interest due to the late payment, that would be taxable.