Discussion:Taxability of Death Benefit and Dividend Accumulations
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Discussion Forum Index --> Tax Questions --> Taxability of Death Benefit and Dividend Accumulations
| 8 April 2006 | |
| Have client who died in 2005. Beneficiary received following statement outlining check:
Basic Death benefit $5000.00 Dividend Accumulations $2217.31 Interest On Accumulations $28.79 Refund of Unused Premium $131.94 Termination Dividend $125.00 Voluntary Interest $44.95 Post Mordem dividend $91.43 Can anyone provide guidance on how to report? I know the $5000.00 not taxable, but not sure if rest is, and what return to report on, taxpayer who passed away, beneficiary, or estate. | |
| 9 April 2006 | |
| $5,000 used to be nontaxable. Exclusion from tax has been repealed for decedents dying after August 20, 1996. Possibly it qualifies as a lump-sum distribution (Form 4972).
If accumulations were accrued as of date of death, they should be reported on the 706 and the beneficiary should claim tax on IRD as a miscellaneous itemized deduction not subject to 2%. | |
| 9 April 2006 | |
| This is a life insurance policy. You should also have a 1099. | |
| 9 April 2006 | |
| I had the same question. I was under the impression that proceeds of life insurance including death benefits paid to a beneficiary by reason of insured's death are excluded from gross income. IRC 101. I wasn't aware of any repeal though.
As for the accumulated dividends, I'm not sure. Aren't they usually considered a return of premiums paid, and taxed to the extent they exceeds aggregate premiums? I think the interest and dividends might be reported on a 1099. | |
SterlingLee (talk|edits) said: | 9 April 2006 |
| Only IRC section 101(b) was repealed in 1996.
IRC section 101(a) remains intact and states "Except as otherwise provided in paragraph (2), subsection (d), and subsection (f), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured." Unless either (2), (d), or (f) are at play, the exclusion from gross income rule remains. The three exception areas are: (2) Transfer for valuable consideration (assign the rights to the proceeds to someone else) (d) Payment of life insurance proceeds at a date later than death (make a deal with the insurance company to allow interest to accumulate on the death benefit-- which is taxable.) (f) Proceeds of flexible premium contracts issued before January 1, 1985 payable by reason of death ("flexible premium contracts"??-- I have no idea, but this section's relevance is probably rare). See IRC section 101: <<http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000101----000-.html>> | |
| 9 April 2006 | |
| (2) Does not apply here. Nor does (d). (f) - Well, I do not know, but it appears policy was issued before 1982.
I agree with Beng - I thought maybe the accumulated dividends might be considered a return of premium. Sterling - thanks for the clarification and code section. Client claims they did not receive a 1099. I got the above figures from a statement that came with the check. | |
| 9 April 2006 | |
| The voluntary interest should be the only item taxable to the beneficiary. All the other items are 712 doohickeys. Reportable value for 706. | |
SterlingLee (talk|edits) said: | 9 April 2006 |
| JDACPA's scenario is not clear whether the $5,000 was an employee death benefit issued by the employer.
Now I understand where SharonCPA was coming from: the repeal of section IRC 101(b) eliminated the $5,000 exclusion from tax for employee death benefits. If the check in question is from the employer, then it's probably taxable; if the $5,000 is not from an employer, then that amount is excluded from gross income. | |
| 9 April 2006 | |
| I feel so ignored. "return of unused premium"?? "dividend accumulations"?? See Form 712 [[1]] | |
| 9 April 2006 | |
| Also I would expect decedent to have paid tax on annual accumulations over the years. | |
| 3 September 2009 | |
| ----
Another Taxable Vs NonTaxable Q? Surviving spouse receives 25,861 from lump sum payments of 2 Life Insurance policies purchases 0ver 30 years ago as a result of the death of her husband. The 2 policies had FV of 10k and 6k. Would not tax treatment be as follow? 16k - Not Taxable 9,861 - Taxable as Int Income - Payors should issue 1099-Int on each of them. I hear death benefits are usually not taxable however I feel this is reported differently due to the appreciation of the policies. Comments/Suggestions...or do I need to provide additioanl information to answer this? | |
| September 4, 2009 | |
| When did the insured die? If it's all a lump sum payable promptly after death, it's all tax-free. Sec. 101(c) applies to interest accruing after death when the payment is delayed (most commonly, by being spread out over several years). | |
| 4 September 2009 | |
| He died 7/25/09 and as was noted was a lump sum payment. | |
| 4 September 2009 | |
| ok...I read Sec 101(c) it states Generally the Lump Sum Payment is not taxable however calling the IRS they state the excess of the FV of the policies is taxable.....SO which IS IT? 50% SAY Y 50% SAY N. Course as we know you can get various answers when talking with the IRS....I could always obtain an PLR as one option.
So what does this forum say others than those already providing their professional opinion? | |
Death&Taxes (talk|edits) said: | 4 September 2009 |
| And none of this is the accumulated dividends plus accumulated interest thereon?
I agree with Lionel on the facts you gave us. | |
| 5 September 2009 | |
| Will obtain from client the documentation received if any when she rec'd her lump sum payment. Then determine if excess is accumulated dividends or interest. | |
| 5 September 2009 | |
| Now that we know that the cash build-up occurred before death on July 25, I think we can safely say that the death benefit, including the cash build-up, is excludible. | |
