Understanding 1099 Forms: Life Insurance Edition

A 1099 form is a tax statement that reports income earned outside of traditional employment. It is used to report non-employment income to the Internal Revenue Service (IRS). There are several types of 1099 forms, and the one you receive depends on the type of income earned. For example, freelancers and independent contractors who earn $600 or more in non-employment income should receive a 1099-NEC. If you receive life insurance proceeds as a beneficiary due to the death of the insured person, this is generally not includable in gross income and doesn't need to be reported. However, if you receive interest on the life insurance proceeds, this is taxable and should be reported as interest received. If you receive a distribution or payout from a life insurance contract, you may receive a 1099-R, which reports distributions regardless of taxability. This means it's possible to receive a 1099-R even when no taxes are due on the distribution.

Understanding the 1099-R form

The 1099-R form is one of several types of 1099 forms used to report income to the IRS. A 1099 form is a tax statement that lists how much income you earned from a person or business that paid you nonemployee compensation throughout the year.

A 1099-R form is issued when a taxpayer receives a distribution or payout from a pension, retirement plan, or individual retirement account (IRA). Certain annuities and life insurance contracts may also issue 1099-Rs.

It's important to note that not all retirement distributions are taxable. Consult a tax professional if you're unsure whether you should pay taxes on a distribution.

The 1099-R will include the following information:

• Box 1: The total amount distributed from your contract, including income taxes and fees withheld, if any.
• Box 2a: The total amount of your distribution reported to the IRS as taxable. This will be zero when the distribution is reportable but not taxable (such as a qualified rollover or 1035 exchange).
• Box 4: The total amount of federal income tax withheld from your distribution.
• Box 7: Defines how your distribution is reported to the IRS. For example, Code "7" is a normal distribution, and Code "6" is a 1035 tax-free transfer. Refer to the "Instructions for Recipient" section of your 1099-R for a complete list of distribution codes and descriptions reported in Box 7.
• Boxes 14-19: Report state and local tax and withholding information.

If you receive a 1099-R form, it's important to review the information carefully and ensure that it accurately reflects your income and distributions. If you identify any errors or discrepancies, contact the payer or the IRS for assistance.

Additionally, it's important to keep in mind that even if you don't receive a 1099-R form, you are still responsible for reporting all sources of income on your tax return.

Reporting taxable and non-taxable events

A 1099 form is a tax statement that reports income earned outside of traditional employment. It is used to report non-employee compensation, as well as distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, and insurance contracts.

There are several types of 1099 forms, and the one you will need to fill out depends on the type of income earned. For example, freelancers and independent contractors typically receive a 1099-NEC, while those who have received distributions from a life insurance contract will receive a 1099-R.

It is important to note that receiving a 1099 form does not necessarily mean you owe taxes on that income. There are both taxable and non-taxable events that require a 1099 form to be filled out and sent to the IRS.

Taxable Events

Taxable events include any distributions from a life insurance contract that exceed the premiums paid. This could include withdrawals, loans, or surrenders of the policy for its cash value. For example, if you withdraw an amount from your life insurance policy that exceeds your cost basis, you will owe taxes on this amount. The 1099-R form will show the total amount distributed to you in Box 1 and the taxable amount in Box 2a.

Non-Taxable Events

Non-taxable events include qualified rollovers or 1035 exchanges. These are still reportable to the IRS and may trigger a 1099 form. For example, if you buy a new life insurance policy by making a 1035 exchange, you will receive a 1099-R reporting the distribution amount, but the taxable amount will be $0.

Additionally, if you receive life insurance proceeds as a beneficiary due to the death of the insured person, this income is generally not taxable and does not need to be reported. However, any interest received on the proceeds is taxable and should be reported as interest income.

Calculating the taxable amount

When it comes to calculating the taxable amount on a 1099 form related to life insurance, there are a few key considerations and steps to keep in mind. Firstly, it's important to understand that a 1099-R form reports distributions from profit-sharing or retirement plans, as well as life insurance or annuity contracts. Even if no taxes are due on the distribution, a 1099-R will still report the amount. For example, if you take out a loan against your life insurance policy, you may not owe any taxes on that amount, but you will still receive a 1099-R reporting the distribution.

Now, let's walk through the steps of calculating the taxable amount:

Step 1: Understand the Components

The taxable amount on a 1099-R for life insurance is calculated by finding the net cash surrender value and then subtracting the premiums you have paid into the policy. The net cash surrender value is the total amount you receive from the insurance company when you surrender the policy.

Step 2: Identify the Numbers

To calculate the taxable amount, you will need to know two numbers: the total amount received from the insurance company and the total premiums you have paid into the policy.

Step 3: Perform the Calculation

Let's say you surrender a life insurance policy and receive a lump sum payout of $250,000. You have been paying premiums on this policy over the years, totalling $115,000. To find the taxable amount, you would subtract the premiums paid from the total amount received:

$250,000 (total amount received) - $115,000 (total premiums paid) = $135,000 (taxable amount)

Step 4: Report the Numbers on the 1099-R

On the 1099-R form, the total amount you received from the insurance company would be reported in Box 1, and the taxable amount (after subtracting the premiums) would be reported in Box 2a. In this example, Box 1 would show $250,000, and Box 2a would show $135,000.

It's important to note that there may be adjustments to the taxable basis, as some riders may not count towards your taxable basis in a life insurance policy. Therefore, it is recommended to consult a tax professional or financial representative if you have specific questions or need clarification on how to fill out the 1099-R form accurately.

What to do if you receive a 1099-INT

If you receive a 1099-INT tax form, it means that you earned at least $10 in interest income from a bank, brokerage, or other financial institution. This is a record that a person or entity paid you interest during the tax year. Simply receiving this form doesn't necessarily mean you owe taxes on that money.

You will need to use the information on a 1099-INT to help fill out your annual income tax return. Box 1 of the 1099-INT shows how much interest income you were paid throughout the year, which you will need when filing your return.

A 1099-INT is typically sent out in February. If you receive one, be sure to hang on to it, as it can have a big impact on your tax return.

If you receive a 1099-INT, you may also get a few other 1099 tax forms in the mail:

• The 1099-DIV reports dividends you received.
• Form 1099-OID if you bought bonds, notes, or other financial instruments at a discount to the face value or redemption value at maturity.
• If you got distributions from a pension, retirement plan, profit-sharing program, an IRA or an annuity, you might receive a 1099-R.

When to expect your 1099 form

The majority of 1099 forms are due to be sent out by January 31st of the year following the income year. If the deadline falls on a weekend, the due date rolls over to the next business day. If you haven't received your 1099 by mid-February, the IRS suggests you contact the payer as soon as possible.

Different types of 1099 forms have different due dates. For example, Form 1099-NEC is due by January 31st, while Form 1099-MISC is due by February 1st or February 16th if substitute dividends and tax-exempt interest payments are reportable by brokers or gross proceeds paid to attorneys. Form 1099-S is typically due by February 15th.

If you are sending 1099 forms, most are due to the recipient by January 31st. If you are mailing a paper form to the IRS, it must be postmarked by February 28th.

If you are expecting a 1099 form and don't receive it by mid-February, you should contact the payer as soon as possible. You can also call the IRS customer service number for assistance if you are unable to get in touch with the payer.

Frequently asked questions