4.9 Interest/Dividends/Other Types of Income: Life Insurance & Disability Insurance Proceeds
Are proceeds paid under a life insurance contract as defined in
IRC 7702 taxable and do they have to be reported as income?
Generally, if you receive the proceeds under a life insurance contract
because of the death of the insured person the benefits are not taxable income
and do not have to be reported. Any interest you receive would be taxable
and would need to be reported just like any other interest received.
However, if the policy was transferred to you for valuable consideration,
the amount excluded from gross income, pursuant to IRC 101 (a) (1), shall
not exceed an amount equal to the sum of the value of the consideration you
paid for the transfer of the policy and other amounts you subsequently paid
by the transferee.
References:
I am receiving long-term disability. Is it considered taxable?
Generally, you must report as income any amount you receive for your disability
through an accident or health insurance plan paid for by your employer.
If both you and your employer have paid the premiums for the plan, only
the amount you receive for your disability that is due to your employer's
payments is reported as income. If you pay the entire cost of a health or
accident insurance plan, do not include any amounts you receive for your disability
as income on your tax return. If you pay the premiums of a health or accident
insurance plan through a cafeteria plan, and the amount of the premium was
not included as taxable income to you; the premiums are considered paid by
your employer, and the disability benefits are fully taxable.
Refer to Publication 525, Taxable and Nontaxable Income, for
more details. If the amounts are taxable, you can submit a Form W-4S (PDF), Request for Federal Income Tax Withholding, to the insurance
company, or make estimated tax payments by filing Form 1040-ES (PDF), Estimated Tax for Individuals.
Amounts you receive from your employer while you are sick or injured are
part of your salary or wages. Report the amount you receive on line 7, Form 1040 (PDF); line 7, Form 1040A (PDF); or line 1, Form 1040EZ (PDF). You
must include in your income sick pay from any of the following:
A welfare fund.
A state sickness or disability fund.
An association of employers or employees.
An insurance company, if your employer paid for the plan.
Payments you receive from qualified long-term care insurance contracts
will generally be excluded from income as reimbursement of medical expenses
received for personal injury or sickness under an accident and health insurance
contract. Also, certain payments received under a life insurance contract
on the life of a terminally or chronically ill individual (accelerated death
benefits) can be excluded from income. Refer to Publication 17, Your
Federal Income Tax, Chapter 13, Other Income.
You may be able to deduct your out of pocket expenses for medical care
above any reimbursements, if you are eligible to itemize your deductions.
You will need to review Publication 502, Medical and Dental Expenses.
For more information, refer to Publication 907, Tax Highlights
for Persons with Disabilities.
References:
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