Cashed in Life Ins Policy
We cashed in our ins. policy and received money. Does that need to be included as income even though there are no taxable gains? We were going to pay taxes on it and they told us we did not need too. I don't want to add as income and be taxed if I do not have to. We paid the balance of our mortgage with the money we received. Thanks for the help!
Best Answer
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That is a great question! Every situation is different so the IRS has a great tool you can use to help determine if the Life Insurance proceeds are taxable. I have provided a link to the IRS Interactive tool.
Answers
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Thank you! I did the test and my proceeds are not taxable.
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NYS Miscellaneous Subtractions: "Accelerated death benefits received that were includable in recomputed federal AGI?"
If your receive more proceeds than you paid out in premiums, would you be able to consider them "accelerated death benefits"?
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Hello,
In the case of New York specifically, "accelerated death benefits" typically refer to life insurance proceeds that are paid out to a policyholder before their death, often due to a terminal illness. These benefits are usually excluded from federal gross income.
However, if you receive more proceeds than you paid in premiums, it might not automatically qualify as accelerated death benefits, especially if the payout is considered a cash surrender of the policy rather than an accelerated benefit due to illness.
In New York State, if the proceeds are indeed classified as accelerated death benefits and were included in your federal AGI, you may be eligible to subtract them when calculating your New York State taxable income. It is important to ensure that the benefits meet the specific criteria for accelerated death benefits under both federal and state tax laws.
The line you are referencing from our software would be used if accelerated death benefits were included on the federal return, but are not taxable to New York.
Lastly, in the case of Beachgirl56's question, this wouldn't apply because she stated the proceeds were not taxable.
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Thanks WrenD,
My wife (58 yoa) cashed out her life insurance policy and received a 1099R showing taxable proceeds of $900, which were more than what she had paid in premiums. The Insurance Company withheld $200 for federal taxes but nothing for NY State. The NY state deduction software keeps asking: "Enter any qualifying taxable pension income Michelle received from New York State or New York local government or the federal government in 2024:" This was a life insurance policy, not an annuity but I can't determine whether the $900 proceeds are taxable or not in NY state.
