Life Insurance Cash out

[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%.  THe Distribution Code "7" is selected on each 1099-R.

It appears that TT is double counting the amount.  My return shows I owe $1,907 ($33 is penalty for underpayment).  When I take out the $14,238 for the cashed in policies, it shows we are owed $1,288 (and the penalty disappeared).  This is a swing of the $3,195 listed above.  12% of $14, 238 is $1,708.52.  

These policies were in effect since the early 1980's.

Thanks in advance

John

[Spino]

Just a quick reply:

1) You're right, that looks like a mistake.

2) It's unlikely TT made a calculation mistake, so what's more likely is that something is entered incorrectly, so go over everything and figure it out. That's a big enough discrepancy you don't want to ignore it.

And in a situation like this, I think it will be difficult to give someone in a forum enough information to figure out where things have gone awry. If you can't figure it out, you might want to get someone, either in person or online, to look over your return, either a trusted friend or a professional.

I would begin by going back to the 1099s you input and make sure everything is properly input, but you seem to have already done that. Still, like you say, something seems awry!

[jaxt315]

I finally figured it out!  By adding the 14K of proceeds from the cash out of the policies, it affected the Social Security taxable amount (inreased).  

After removing the 14K as a test, the Social Security Amount dropped alost by as much (decreased).  This then affected the tax calculations.

All set

John

[JulieS · Accepted solution]

When you add a substantial amount of income to your tax return, not only can you moved into a higher tax bracket, there are a number of other calculations that can change. 

The most shocking for most taxpayers is taxable Social Security benefits. If you have Social Security benefits on your return, the extra tax is likely due to an increase in the amount of taxable Social Security. 

For example, on a return where you have $30,000 in Social security income and $30, 000 in other taxable income, $13,850 of the Social Security income is taxable and the total tax is $3110.

If you add $14,328 to the above return, the taxable Social Security increases to $25,500 and the total tax is $7431. That makes it look like you are paying 30% on the extra income.

If this doesn't answer your question please respond back with more details about the type of income, deductions and credits you have on your tax return. 

[jaxt315]

JulieS

I figured out the point you are making yesterday after inadvertantly adding a second thread.  I thought I was sending in a bug notice and it created a second "question".

Yes, it was the shift in Social Security taxable income that caused the confusion.  This is our first year collecting SS Benefits.

Thanks, John