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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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My stepfather passed away 5 years ago and apparently had some

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My stepfather passed away 5 years ago and apparently had some kind of life policy that my mother was the beneficiary for . She passed 4 years ago. I got the check as I am her daughter and was the executor. I am not certain what kind of policy it was but it says I will get a 1099 in January as they are required to report any interest over 10$ then it shows the death benefit amount of 10,000$ and then says death claim interest of 6,000$ for a total of 16,000$ what amount am I going to have to pay taxes on and at what rate

Lev :

Hi and welcome to our site!

There are several issues to address...

As a recipient of inheritance - the person does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 31 (left column) -
Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.
That includes all assets owned by the decedent at the time of death. Other assets should be examined separately. In particular - for life insurance proceeds - see the same publication - page 21

Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.

Interest option on insurance. If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you are paid is taxable.

So far - the interest income is taxable and is reported on form 1040 line 8a.
While the life insurance proceeds are generally not taxable - the tax treatment is different for life insurance benefits provided under employer retirement plan. In this case you must include in income any life insurance proceeds received that are more than the premiums and any other amounts paid on the policy.
So - you may contact the payer and verify the type of insurance contact and if the full or partial amount is taxable.

Lev :

When distributed - that amount is reported on form 1099R - which will report amounts of total distribution and taxable amount - AND the amount that was withheld
- from 1099R box 1 - total distribution
- from 1099R box 2a - taxable part of the distribution - if the decedent made any after tax contributions that amount would not be included. Otherwise - amounts in box 1 and box 2a will be equal.
- from 1099R box 4 - that is the amount of tax withheld which is credited toward tax liability.
Your actual tax liability is not determined separately for each payment - but will be based on your total income. The taxable amount will be added to your other taxable income - and your tax liability is determined based on the total amount, filing status, deductions, etc.
As a raw estimate - you may verify your tax bracket - see tax rate schedule on the last page in this publication -
Thus - if you are in 15% tax bracket - that income will be taxed at 15% level.

Customer: And so the taxable rate would be what my normal income tax rate would be ?
Customer: Ok
Lev :

Yes - it will be taxed as ordinary income - and the tax rate will be based on your total income.
I will help you to estimate if needed.

Customer: Based on that schedule I make between 75-140 so my tax rate would be 25% ? So if I was paying on the interest only that would be 1500$ ? How would that work for state and federal . I am trying to get a pretty accurate amount as I have to split this was a sibling but it is in my name so I need to hold back the tax part or I may never get it back
Lev :

That is correct - if you are in 25% tax bracket - that additional income will be taxed at 25% level.
So - in $6000 interest income - you will have $1500 tax liability.
Still you need to verify if death benefits of $10,000 are taxable or not. To be on save side - you may keep 25% till your tax return is filed and you clear know the tax liability.
Similarly state income tax liability are determined - let me know your state - and I will verify tax rates.

Customer: Virginia
Customer: How do I verify weather death benefits over 10,000 would be taxed I just called the insurance company they said I would need to consult with a tax professional but they THINk I would only need to pay taxes on the interest
Lev :

In Virginia - there is tax rate 5.75% on taxable income above $17,000. In your income level - that will be your state income tax rate.

Customer: So 25% to federal and 5.75 to state
Lev :

As I mentioned above - life insurance proceeds paid to you because of the death of the insured person are not taxable. In this case the form 1099R should report $10k in box 1 and zero in box 2a. If that assumption is correct - you need to confirm with the payer or simply wait will you receive this form.

Customer: Thanks this is all very confusing as they say to consult with a tax professional
Lev :

Yes - as a raw estimate - the tax rate would be 25% to federal and 5.75% to state on additional taxable income.

Lev :

Yes - you may consult with a tax professional - but we need to know what type of insurance policy you have. As we discussed - the life insurance is not taxable - but if that is a life insurance clause of the retirement plan - it will be taxable.
So - to be precised - we need to verify the type of the life insurance.

Customer: She said she didn't have the exact type of policy in front of her but it looked to just be regular life insurance
Customer: And will it make a difference if I was not the original beneficiary ? As my mother was but she passed before it was found to have existed
Lev :

In this case - proceeds are not taxable - and should be reported on form 1099R as we mentioned above - $10k in box 1 and zero in box 2a. If that is correct - there will be no tax liability on proceeds.
It doesn't matter if benefits were to be paid to your mother - in this case - you received inheritance which is not taxable - see #1 above.

Customer: I finally got a answer from them yes it was a whole life traditional plan and the face value paid was 11,234 the rest was interest
Lev :

Ok - so proceeds are not taxable - but interest will be reported as taxable income.

Customer: K thanks
Lev :

You are welcome.

Customer: One more thing is there a way to make a pre tax payment in advance
Lev :

Yes - you may simply increase your withholding from your regular job.
You may make estimate tax payment using form 1040ES -‎
You may simply send a check to the IRS - they will be glad to accept - in the memo put your SSN and the tax year for which you are making payment - 2013.
You may ask a payer to withhold income taxes - if they agree.

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