In most instances (but not in every single instance),
proceeds from life insurance policies (especially those that are "cashed out") are not taxable, or even reportable, on any tax
return.
To explain this, we should first understand that Life
Insurance is a financial product purchased with after-tax dollars.
Therefore, the payout from a life insurance policy is typically a
non-taxable, and non-reportable (that is, disclosed on a tax return), event.
But,
there are occasional exceptions. For example, certain Whole Life
Insurance policies invest a portion of the policy premiums in such a way
that the policies pay dividends. These annual dividends are
reportable, and taxable, as they then go toward purchasing additional
increases in the face value of the insurance policy.
When that is the (annual) case,
you should receive a separate tax document from the insurance
company (called a Form 1099-DIV or 1099-INT) for inclusion on your
annual personal income
tax return. However, the principal value of the cashed-out policy
would not be taxable; instead it would be considered a non-taxable
return of capital, and hence, there would be nothing to report on your
tax return.
In conclusion, therefore, unless your mother receives a tax reporting
document from the insurance company, indicating that some of the life
insurance proceeds (or dividends) are taxable income to her, then you may
safely ignore this cash-out event on your mother's tax return, for tax filing purposes.
Thank you for asking this important question.
