How to Pay Taxes on an Insurance Policy
The good news is that most insurance payments do not represent taxable income. The bad news is that not all insurance payments are tax-exempt, and not all insurance companies are good about telling you which payments are and which aren't. In general, insurance money that replaces income and interest-bearing life insurance payouts are the most commonly taxed payments from an insurance company. Paying taxes on the proceeds or interest from an insurance policy can be confusing, but normally this works like any other dividend.
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Instructions
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Contact your insurance company. Identify the policy and any payments by number and owner. Ask directly if that policy is subject to taxation. If the representative or agent you speak with doesn't know, ask to speak with somebody who does.
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2
Determine if a taxable insurance policy is taxable during that tax year. Like other dividends, taxable events in insurance policies are usually taxable only if you cash them out. For example, a universal life policy that gained interest would be taxable only if you cashed out that interest during the current tax year.
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3
Investigate the payouts for each taxable insurance policy. Find out if they are taxable as employment income --- and thus subject to employment taxes such as Social Security --- or as other income.
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Estimate your taxes from each applicable policy by using the tax tables for federal and state taxes.
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5
Hold in your savings a portion of the insurance payout, based on the estimated tax burden from the taxable policies.
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Include the insurance policy information in your calculations for the appropriate entries on your tax documents. Your exact tax payment for the year will take into account income, expenses and deductions from factors outside the insurance policy itself.
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File your taxes normally, including the information about your insurance policy.
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Tips & Warnings
Tax law is very complex, and there are severe penalties for making mistakes. If you have any doubts at all about the tax status of your insurance policy, check with your accountant or tax lawyer.
