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Do we owe tax on full amount in box 2a of 1099? (Life insurance Proceeds)?
Our family had a small ($5000) life insurance policy for 50 years that we stopped paying premiums for many years ago. All we knew was that we were paying tax on each years income that we never received.
Finally, we decided to cancel the policy and get a couple hundred dollars. Now we received a 1099 for over $2000 in the Taxable amount box (2a) and box 2b is marked that taxable amount is total distribution.
In hindsight, I think we are being taxed for a loan against the policy that was automatically paid off, and that we owe the tax. (or this there any adjustment I am not aware of?)
I just want to confirm with those more knowledgeable about insurance and taxes before we complete our tax return.
thanks
1 Answer
- Anonymous8 years agoFavorite Answer
The policy had a clause that said if you stopped paying the premiums, they would use the cash value to continue it--by loaning you the money to pay the premiums.
Had you terminated the poicy the year you stopped paying for the premiums, you wouldn't owe.
Since you used the cash value to continue the policy--meaning you got something for it--the total amount loaned to you is now considered a distribution and taxable.
The fact that the person who was insured didn't die and collect the face value of the policy is irrelevant.