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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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Hello. I received life insurance from my fathers policy when

Resolved Question:

Hello. I received life insurance from my father's policy when he died. I put the funds in a brokerage account. I withdrew some of the funds in 2007. I got a notice from the IRS recently that claims I owe back tax on those withdrawals. Their calculations show that they added the withdrawals as taxable income for 2007. I was told I wouldn't have to pay taxes on these funds. Is this correct?
Submitted: 8 years ago.
Category: Tax
Expert:  RD replied 8 years ago.

Did you invest in stock and sold the stock in brokerage account and than withdraw the fund?

 

Life insurance proceeds are not taxable.

Customer: replied 8 years ago.
I invested in mutual funds and sold them when I made the withdrawals.
Customer: replied 8 years ago.
I invested in mutual funds and sold them when I made the withdrawals.

Expert:  RD replied 8 years ago.

That is why you received a notice. You need to amend your tax return and report your gain or loss from sale of mutual funds.

 

Since IRS does not have your cost information, they consider the entire sale price as income and hence the tax liability seems huge.

But if you determine your gain or loss than depending on the gain or loss you may have little or no tax at all.

 

 

Customer: replied 8 years ago.
Please forgive me for seeming simple but does this mean I owe taxes only on the interest income I earned and not the principal that I invested?
Expert:  RD replied 8 years ago.

Yes, you are right. You will owe tax only on the interest or dividend income and on the capital gain that you may have on sale of the funds. Capital gain/loss is calculated as sale price of fund minus the cost price of the fund.

 

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