Which IRS Form Do You Use for a Death Benefit?

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When someone passes away and you receive a death benefit in some form, the value of the benefit is usually not taxable and need not be reported on your taxes. There are some exceptions, however. In these cases, the form you need will usually be sent to you by the institution paying the death benefit.

Life Insurance Death Benefits

  • A lump sum payout of life insurance is not taxable. However, when life insurance proceeds are paid in installments, or held for a time pending documentation, the money may earn interest. This interest is taxable and is reported like any other interest earnings on your tax return. Proceeds from a life insurance policy may also be taxable if you received the policy in return for a payment. You’ll be sent an IRS Form 1099 by the insurer that you must attach to your tax return.

Other Death Benefits

  • Taxable death benefits include interest or stock dividends earned by inherited assets after the date of death. Withdrawals from an inherited retirement account like a 401(k) or traditional IRA are also taxable. In each case, the financial institution that handles the asset must send you the appropriate 1099 form. In addition, if you sell an inherited capital asset like stock or real estate for more than its value on the date of death, the gain is taxable. Capital gains are reported on your tax return using Schedule D, “Capital Gains and Losses.”

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