How are Death Proceeds Taxed? - LifeQuotes.com

How are Death Proceeds Taxed?

death taxesBy LifeQuotes.com

American journalist and author Mignon McLaughlin said it best, “Philosophy teaches a man that he can’t take it with him; taxes teach him he can’t leave it behind either.”

However, there is some comfort in the knowledge that income tax liability is exempted from life insurance death proceeds.

In the United States, estate tax is imposed on the transfer of the “taxable estate” of a deceased person, which can also include payment of life insurance benefits to beneficiaries.

The proceeds from a life insurance policy are not subject to income tax. Still, a beneficiary could be taxed on the proceeds of any life insurance policy he or she purchased. But a beneficiary’s compensation cannot be changed without his or her consent.

“This is very rare,” said Keith Diffenderffer, President of Endowment Income, LLC in Chula Vista, Calif. “It would probably require a contractual irrevocable beneficiary designation to be enforceable.”

Typically, a beneficiary does not pay income tax on a gift or inherited property. But a beneficiary can incur income tax liability in the form of capital gains or capital loss if he or she later decides to sell the gift or property because Uncle Sam does not like being left out in the cold.

To calculate the amount of tax liability, the beneficiary needs to know the gift or inherited property’s price. Inherited or gifted property has a different tax structure and is based on whether the property was received as a gift during life or simply inherited.

One way to remove insurance from a taxable estate is to relinquish all rights to it by assigning the policy to someone else. However, there could still be a gift tax imposed on it. But only the cash value of the policy and the unearned and subsequent premiums paid by you are subject to the tax, and not the face value of the policy.

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