Cash value surrender

[tractng]

I called in today (Jan 16, 2024) to start the close process of the universal life insurance policy.  Customer service told me they will be sending me some form to start the termination process.  A bit confused on what she said regarding a 1099 will be issued before Jan 31.

There is cash value before tax of around $6800.  Will this be for tax filing for next year (2025) and not this year?

Just making sure..

Thanks,

TT

[xmasbaby0]

A transaction you are doing today in 2024 will go on your 2024 tax return that you prepare and file next year in 2025.

[Carl · Accepted solution]

There is cash value before tax of around $6800. Will this be for tax filing for next year (2025) and not this year?

Yes. Since you will cash out the policy in 2024, your taxable earnings (if any) will be reported on your 2024 tax return, which you will complete in 2025.
Most likely when told a 1099 would be issued before Jan 31, they most likely mean Jan 31 of 2025, which is what I would expect.

Once you receive the check, I would highly recommend you go ahead and pay 20% of it to the IRS so you don't come up short when you file your 2024 taxes next year, and end up owing. You can do that online at www.irs.gov/payments and *SAVE* *YOUR* *RECEIPT!* with your 2024 tax information.

[tractng]

Figured.  Thanks for the confirmation!

[tractng]

Is this considered ordinary income?  Lets say I plan to retire soon and don't plan to have any other income, would it be better to withdraw from the policy then?

[Vanessa A]

Only the part that is considered earnings will be taxed as ordinary income.  The part of the distribution that is comprised of your contributions will not be taxed.  So, if your contributions are $5,000 and your policy earned income of $1,800, then the $1,800 would be included in your ordinary income. 

If you have no other taxable income for the year, then it would not be taxable as it would be below your standard deduction which for 2024 would be $14,600.

[Mike9241]

you are surrendering the policy so you will be taxed only if the CSV exceeds your tax basis (as ordinary income). No loss is allowed. 

we don't know anything about the policy so can't say if it would be better to wait. with some types it's possible for the CSV to actually decrease. Discuss with your insurance agent. 

[dmertz · Accepted solution]

The Form 1099-R will be a 2024 Form 1099-R issued by January 31, 2025.

[tractng]

Thank you guys for the detail answer!!

[tractng]

I just received the surrender forms.  Looks like I can elect to not have any tax withhold on my surrender value and pay at tax time or go to the site you specified to pay 🙂

[Carl]

I just received the surrender forms. Looks like I can elect to not have any tax withhold on my surrender value and pay at tax time or go to the site you specified to pay

That's fairly typical where you make an election prior to the payout. Depending on the amount to be taxed, you can go with what you want. I know when I cashed my whole life policy out a few years ago, the payout was something around $45K with $12K being taxable. I elected to have 20% of that $12K withheld for federal taxes so I wouldn't have a large tax bill at tax filing time. Then in the end when I did file my taxes I ended up getting about $400 of that refunded back to me from the IRS.
Had I not does that, then at tax time I would have owed close to 2K in taxes, which could have been painful on the financial front to have to pay it all in one shot.

[tractng]

I called the insurance and was told that I won't be receiving any tax form since my contributions over the years were more than the cash value.

TT

[RobertB4444]

In that case there is no taxable event and you don't need to worry about it.

@tractng