1099R ....From life insurance company???


M

Mike

I need help with a 1099R from a life insurance policy. Many
years ago I took out a whole life policy and I could only
afford to pay the premium once. Every year my agent would
take out a loan against the policy to pay the premium. I
would pay the interest on the loan every year. Last year I
let the policy lapse. I received a 1099R for almost
$17,000. I called my agent and he said to ignore the 1099.
I'm afraid if I do I will get hit eventually. Turbo Tax is
treating it as an annuity income. My thoughts are; Even
though my insurance company advanced me the money on paper,
if I died they were going to deduct it from the payoff, I
never realized any gain, Even if I have to pay I should only
have to pay the amount that was loaned in each year I
received it? The 1099 says it was a "normal distribution".
What's normal mean? On the back of the 1099 it says that
there should be a code L if I have to claim it. I don't see
anywhere a code L. Do I have to report it on both Federal
and State forms? Any response will be most appreciated.

The form says;
Zero-basis-pol
box 1 Gross Distribution 17,000 (and change)
box 2A Taxable amount 17,000
box 2B Total distribution
box 7 distribution code 7

Total Gross Distributions 17,000
 
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E

Ed Zollars, CPA

Mike said:
I need help with a 1099R from a life insurance policy. Many
years ago I took out a whole life policy and I could only
afford to pay the premium once. Every year my agent would
take out a loan against the policy to pay the premium. I
would pay the interest on the loan every year. Last year I
let the policy lapse. I received a 1099R for almost
$17,000. I called my agent and he said to ignore the 1099.
Very bad advice--assuming the insurance company got the
basis in the policy right (and I presume they did), it's
going to be income to extent the debt forgiven is greater
than your basis in the policy (roughly what you have paid in
premiums, most likely).
I'm afraid if I do I will get hit eventually. Turbo Tax is
treating it as an annuity income.
Intuit has that one right.
My thoughts are; Even
though my insurance company advanced me the money on paper,
if I died they were going to deduct it from the payoff, I
never realized any gain,
Not true--the deal is that *death benefit* proceeds are not
considered taxable income. However, cashing in a policy
while you are alive is taxable. If that wasn't the case,
there would be a lot of people out there cashing out
policies, since otherwise they serve as a tax shelter
vehicle.

Congress is willing to give a benefit to heirs after the
death of the insured. They aren't going to declare open
season on using "insurance" that exists solely to evade tax,
and is not being used to provide a death benefit.
Even if I have to pay I should only
have to pay the amount that was loaned in each year I
received it?
Nope, that's the game that is played with insurance--as long
as you are under an obligation to repay it (which you were),
it's not income. That's just as true as if I went to the
bank and signed a note for $10,000.

I also presume you didn't report as income in those years
either, so the point seems moot at best.
The 1099 says it was a "normal distribution".
What's normal mean? On the back of the 1099 it says that
there should be a code L if I have to claim it. I don't see
anywhere a code L.
Code L only applies to qualified plans and deals with deemed
distributions due to failure to comply with the loan
provisions applicable to such items. It does *NOT* apply in
this situation, so that's a red herring.
Do I have to report it on both Federal
and State forms? Any response will be most appreciated.
Yes for federal unless the insurance company fouled up its
computations, and almost certainly yes for state.
The form says;
Zero-basis-pol
box 1 Gross Distribution 17,000 (and change)
box 2A Taxable amount 17,000
box 2B Total distribution
box 7 distribution code 7

Total Gross Distributions 17,000
Looks like $17K of income to me.

Note that if your agent told you that there would be no tax
consequence of letting the policy lapse before you let it
lapse, I think he has some explaining to do. Note that the
tax department of the insurance company itself will almost
certainly confirm that they certainly believe it *is*
taxable.
 

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