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srhipps
New Member

How do I file the sale of a life insurance policy. I received a 1099 misc.

Received a 1099 misc for other income. I am not in any business.This was for the sell of a life insurance policy. The taxable portion has not been determine.I need to know how to file.

2 Best answer

Accepted Solutions
ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

Additional citation and information

Section 13521(a) of the TCJA allows the seller of a policy to include all premiums paid in cost basis when calculating taxes due on a settlement transaction. It provides a "clarification of tax basis of life insurance contracts" (codified at Sec. 1016(a)(1)(B)) stating that when determining the basis of property, no adjustment is made "for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract."

Thus, sellers of life insurance are now afforded the same tax treatment as those who surrender their policy. Policy owners are now therefore more likely to sell an unwanted policy to a third party rather than simply surrendering or canceling the coverage. 

For provenance of citation, go here:

https://www.congress.gov/115/plaws/publ97/PLAW-115publ97.htm

SEC. 13521. CLARIFICATION OF TAX BASIS OF LIFE INSURANCE CONTRACTS. (a) Clarification With Respect to Adjustments.--Paragraph (1) of section 1016(a) is amended by striking subparagraph (A) and all that follows and inserting the following: ``(A) for-- ``(i) taxes or other carrying charges described in section 266; or ``(ii) expenditures described in section 173 (relating to circulation expenditures), for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; or ``(B) for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract;''. (b) <<NOTE: 26 USC 1016 note.>> Effective Date.--The amendment made by this section shall apply to transactions entered into after August 25, 2009.
Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time

View solution in original post

ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

@srhipps

The surrendering of an existing in-force life insurance policy back to the underwriting company or the sale of that same policy to a third-party, typically an investor who will hold the policy for the purposes of obtaining ultimately the death benefit, are taxable events.  Since you chose the second approach to obtain value that had built up in your policy, this answer only covers that second alternative which is technically called a Life Settlement.

Before going further, @srhipps or any other reader, please be advised that the Tax Cuts and Jobs Act of 2017, overrode the previous guidance on the taxation of life settlements under IRS Revenue Ruling 2009-13.)  That is to say, anything you might have understood about the Cost Basis calculation used in either a surrender or a life settlement done prior to 2017 is no longer valid.

The sale of a life insurance policy is a taxable event and the characterization of gains is determined under the guidelines set out in IRS Revenue Ruling 2009-13 by the Tax Cuts and Jobs Act (TCJA) of 2017

The sale or surrendering of an in-force life insurance policy creates a tax liability because, from the IRS perspective, the policy has a calculable cost (the "Cost Basis"), as if it were an investment, and has obviously a sale value shown by the proceeds that you receive.

NOTE: "Term Life" policies do not build up a cash value so this question and answer is not relevant to term life policies.

Here is an example to illustrate the effect of taxation of a sale of an in-force policy that has built up cash value:

  • Cash surrender value of $66,000 as stated by insurance company
  • Total premiums paid of $58,000 
  • The policy has been owned for 10 years, has had no withdrawals, and has had no loans
  • The individual insured is not terminally or chronically ill
  • The policy is sold for $75,000 in a life settlement transaction

Prior to TCJA (2017), the cost basis as determined in IRS Ruling 2009-13 would have been the premiums paid reduced by the insurance company’s record of the internal cost-of-insurance charges  - as an example $10,000 so the calculation would have then been ($58,000 – $10,000 = $48,000). 

However, TCJA repealed this interpretation, and instead the cost basis is simply the total premiums paid ($58,000).

Tax liability calculation:   Proceeds of Sale less Cost Basis = $75,000 minus $58,000 = $17,000 taxable

Now, since TCJA (2017) the determination of what is taxable and at what rate becomes more complex.
Of the taxable income (in this example, $17,000), the portion that is the policy’s internal “profit” (the excess of the available cash surrender value over premiums paid) is taxed as ordinary income
  • Cash surrender value of $66,000 less Total premiums paid of $58,000  = $8,000
The remaining gain that the sale generated, $9,000,  is treated as a gain on property interest and is taxed at capital gains rates.

So this example of a sale would generate two separate taxable reported events:
  • Form 1099-MISC Box 3   $8,000 taxed as ordinary income, not subject to employment taxes
  • Form 1099-B  Gain of $9,000 to be reported as a Long-Term investment gain.

Hope this helps to clear up any question.

Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time

View solution in original post

20 Replies
Rainman12
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

Check the form number again; Sounds like you're describing a 1099-R
Lisa995
Level 12

How do I file the sale of a life insurance policy. I received a 1099 misc.

That taxable amount not determined  sounds like a 1099R to me also, a 1099MISC doesn't have anything like that on it.
♪♫•*¨*•.¸¸♥Lisa♥ ¸¸.•*¨*•♫♪
srhipps
New Member

How do I file the sale of a life insurance policy. I received a 1099 misc.

This is not a surrender,but a sale to a third party.
Lisa995
Level 12

How do I file the sale of a life insurance policy. I received a 1099 misc.

What box of the 1099MISC has the money?
♪♫•*¨*•.¸¸♥Lisa♥ ¸¸.•*¨*•♫♪
srhipps
New Member

How do I file the sale of a life insurance policy. I received a 1099 misc.

box 3. Other Income
ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

@srhipps @Rainman12 @Lisa995   Presumably you received a Form 1099-MISC and will, if not yet, receive a Form 1099-B, but even if the payer (insurance company or third-party) fails to supply one, you must report the long-term capital gain obtained.  See example.
Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time
srhipps
New Member

How do I file the sale of a life insurance policy. I received a 1099 misc.

Thanks, you have been very helpful,but the amount in box 3 is the entire purchase price. Is it possible the purchasers do not know what they're doing.
ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

Very likely
The problem it creates for you is that in all likelihood your marginal (ordinary) income tax rate is higher than your capital gains rate, which actually might be as low as zero.

Have to speak to someone and explain the change  - cite the information I provided in second answer with Public Law section.
Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time
ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

Additional citation and information

Section 13521(a) of the TCJA allows the seller of a policy to include all premiums paid in cost basis when calculating taxes due on a settlement transaction. It provides a "clarification of tax basis of life insurance contracts" (codified at Sec. 1016(a)(1)(B)) stating that when determining the basis of property, no adjustment is made "for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract."

Thus, sellers of life insurance are now afforded the same tax treatment as those who surrender their policy. Policy owners are now therefore more likely to sell an unwanted policy to a third party rather than simply surrendering or canceling the coverage. 

For provenance of citation, go here:

https://www.congress.gov/115/plaws/publ97/PLAW-115publ97.htm

SEC. 13521. CLARIFICATION OF TAX BASIS OF LIFE INSURANCE CONTRACTS. (a) Clarification With Respect to Adjustments.--Paragraph (1) of section 1016(a) is amended by striking subparagraph (A) and all that follows and inserting the following: ``(A) for-- ``(i) taxes or other carrying charges described in section 266; or ``(ii) expenditures described in section 173 (relating to circulation expenditures), for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; or ``(B) for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract;''. (b) <<NOTE: 26 USC 1016 note.>> Effective Date.--The amendment made by this section shall apply to transactions entered into after August 25, 2009.
Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time

View solution in original post

ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

@srhipps

The surrendering of an existing in-force life insurance policy back to the underwriting company or the sale of that same policy to a third-party, typically an investor who will hold the policy for the purposes of obtaining ultimately the death benefit, are taxable events.  Since you chose the second approach to obtain value that had built up in your policy, this answer only covers that second alternative which is technically called a Life Settlement.

Before going further, @srhipps or any other reader, please be advised that the Tax Cuts and Jobs Act of 2017, overrode the previous guidance on the taxation of life settlements under IRS Revenue Ruling 2009-13.)  That is to say, anything you might have understood about the Cost Basis calculation used in either a surrender or a life settlement done prior to 2017 is no longer valid.

The sale of a life insurance policy is a taxable event and the characterization of gains is determined under the guidelines set out in IRS Revenue Ruling 2009-13 by the Tax Cuts and Jobs Act (TCJA) of 2017

The sale or surrendering of an in-force life insurance policy creates a tax liability because, from the IRS perspective, the policy has a calculable cost (the "Cost Basis"), as if it were an investment, and has obviously a sale value shown by the proceeds that you receive.

NOTE: "Term Life" policies do not build up a cash value so this question and answer is not relevant to term life policies.

Here is an example to illustrate the effect of taxation of a sale of an in-force policy that has built up cash value:

  • Cash surrender value of $66,000 as stated by insurance company
  • Total premiums paid of $58,000 
  • The policy has been owned for 10 years, has had no withdrawals, and has had no loans
  • The individual insured is not terminally or chronically ill
  • The policy is sold for $75,000 in a life settlement transaction

Prior to TCJA (2017), the cost basis as determined in IRS Ruling 2009-13 would have been the premiums paid reduced by the insurance company’s record of the internal cost-of-insurance charges  - as an example $10,000 so the calculation would have then been ($58,000 – $10,000 = $48,000). 

However, TCJA repealed this interpretation, and instead the cost basis is simply the total premiums paid ($58,000).

Tax liability calculation:   Proceeds of Sale less Cost Basis = $75,000 minus $58,000 = $17,000 taxable

Now, since TCJA (2017) the determination of what is taxable and at what rate becomes more complex.
Of the taxable income (in this example, $17,000), the portion that is the policy’s internal “profit” (the excess of the available cash surrender value over premiums paid) is taxed as ordinary income
  • Cash surrender value of $66,000 less Total premiums paid of $58,000  = $8,000
The remaining gain that the sale generated, $9,000,  is treated as a gain on property interest and is taxed at capital gains rates.

So this example of a sale would generate two separate taxable reported events:
  • Form 1099-MISC Box 3   $8,000 taxed as ordinary income, not subject to employment taxes
  • Form 1099-B  Gain of $9,000 to be reported as a Long-Term investment gain.

Hope this helps to clear up any question.

Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time

View solution in original post

srhipps
New Member

How do I file the sale of a life insurance policy. I received a 1099 misc.

I contacted all the parties involved in this sale.  They all said that I'd received all the paper work that I'm going to get and that I should report this income on form 8949 - page 2 - part 2 - box F - and fill in the information below. I don't see how I can connect this back to a 1099 misc., but this is what I was told to do.  I'm not sure Turbo Tax knows what to do with it.
ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

In fact, you cannot connect a Form 1099-MISC back to the sale which if correctly repoted would be on 1099-B.  The implications to you are very consequential because the sale legally has generated a capital gain to be taxed at c/g rates which could be as low as zero, or 15% or 20% (max); whereas the ordinary income could be 10%-12-24-or higher %.  
The seller has been incompetent in providing the filing.  I'm not sure what you can do about it, except to research if there are other clients also so effected.  There is no logic to the payment being a 1099-MISC Box 3 except that they had no idea what they should have done..
Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time
srhipps
New Member

How do I file the sale of a life insurance policy. I received a 1099 misc.

Thanks, I guess I just will not report it and and wait for an audit. Maybe they will explain it to me then,since no one there will talk to you on the phone.
ScruffyCurmudgeon
Level 9

How do I file the sale of a life insurance policy. I received a 1099 misc.

Can you calculate what would be the appropriate capital gain and make an estimated payment to have on-account?
Scruffy Curmudgeon--PFFM/ IAFF, Locals 718/30, retired firefighter/medic; univ faculty NOT INTUIT EMPLOYEE
- Strategy & Quantitative Methods Med-M&M, Law discriminatory statistics, Med & PH - epidemiology statistics;
USAR 64-67 AIS/ASA MOS 9301 - O3
-------------------------------------------------------
-------------------------------------No Not an Intuit Employee - Just donating my time
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