How to Pay Beneficiary Taxes on Life Insurance Benefits
One of the significant reasons people buy life insurance policies is that the death benefit is not added to the taxable estate. This means that life insurance can be used to pay off a mortgage, fund college tuition or just pay the estate taxes owed on the remainder of the estate. Beneficiaries have the option to take a lump sum payment or to receive payments over time. This is significant because some policies may pay more than the specified death benefit as a result of earnings while the funds remain with the insurance company. These earnings are taxable.
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Instructions
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Read the policy and determine the exact death benefit owed by the policy. You can call and confirm this with the insurance company when you make your claim as beneficiary.
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Choose how you want to take the distribution of benefits. You may choose a lump sum or payments over time. Get the appropriate paperwork from the insurance company, sign it and submit it.
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Confirm with the insurance company how much will actually be paid in benefits and earnings. Find the difference between the paid amount and the guaranteed death benefits. If the death benefit was for $100,000 but you are receiving $100,500, the difference is the earnings.
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Compute annualized payments of benefits and earnings. If the death benefit was $100,000 and you seek to take payments over five years, you will have $20,000 of non-taxable benefits annually. Anything above this amount is taxable and will generate a 1099-MISC from the insurance company.
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File Internal Revenue Service tax Form 1040, recording the 1099-MISC income on Line 21 when filing annual taxes.
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