1099-R reports distributions from: <! – ->
- Profit sharing / pension plans
- Life insurance / annuity contracts
- disability plans
It is important to understand that 1099-R reports distributions regardless of tax liability. This means that it is possible to get a 1099-R even if no tax is due on the distribution.
For example, if you take out a $ 50,000 loan against a universal life insurance policy that you own, you are not liable to pay $ 50,000 in taxes. However, you will receive a 1
More specifically, box 1 in the 1099-R distribution shows $ 50,000. Box 2a will either be blank or specify $ 0 which shows that none of the $ 50,000 distribution is taxable. Here is an empty 1099-R to show the specific boxes: <! – ->
1099-R Taxable Amount
If you submit a life insurance or unqualified annuity for its cash repurchase taxable distribution for you. However, if you want to determine your taxable distribution from the transfer in advance, the calculation is quite simple.
The taxable amount is the net cash value of the net cash minus the premiums you paid for the insurance.
So for example, let's say you own a whole life insurance policy with $ 250,000 in cash value. You have so far paid $ 115,000 in total premiums. If you hand over this life insurance and receive the cash value, 1099-R you should have boxes 1 and 2a filled as follows: <! – ->
Box 1 shows the total amount you received from the insurance company ($ 250,000) . Box 2a shows the cash value minus the premiums you paid, which is the taxable amount. $ 250,000 – $ 115,000 = $ 135,000
Any adjustments to taxable basis
Some riders may not count on your taxable basis in a life insurance policy. So if you are trying to perform the taxable distribution calculation on your own, you may need to adjust the premiums you paid by riders that made up your total premium. The good news is that most life insurance companies keep track of your cost base and make it easily accessible to you.
1099-R will not report any adjustments made to the premiums you paid to calculate your cost base.
What should I do if you think there is a reporting error
If the taxable distribution reported by the life insurer differs significantly from what you calculated for the taxable distribution, you should contact the insurance company and ask for clarification. Although errors are uncommon, they are not unknown.
If the insurance company discovers that they made a mistake when they reported the taxable distribution, they will correct 1099 for you and top it up with the IRS.
You should note that in some cases you will receive the 1099-R more than one year after you submit a policy. For example, if you officially cancel a life insurance policy for its cash value in January, you will not receive R-1099-R for the insurance until around February of the following year to file your taxes. It is wise to note this if you end up in this type of timeline to ensure that you have appropriate records.
If 1099 reports an error, you want to contact the insurance company as soon as possible. You need 1099 corrected to file your income tax return.
1099-R for 1035 exchanges
If you buy a new life insurance policy using a 1035 exchange, you should get a 1099-R that reports the distribution amount and shows a taxable amount of $ 0. This is very similar to getting 1099-R when you take out a cost-based withdrawal or loan from a life insurance company. The main difference is that you never got the money. <! – ->
I mention this because it confuses some people to get a 1099 when using a 1035 gear. They mistakenly believe that they owe taxes on the transfer, which they do not. 1099 will look like the example above for a non-taxable distribution. The entire transfer amount is shown in box 1 with box 2a which does not show any tax base. In addition, box 7 should use should report code 6, which is the specific code for a 1035 exchange. The code for other dividends from life insurance will normally be 7.
The calculation for non-based withdrawals and modified capital agreements
If you withdraw a sum of cash from a life insurance that exceeds your cost base, you are liable to tax on this amount. For example, let's say you have universal life insurance with $ 200,000 in cash value. You have so far paid $ 100,000 in premiums on this policy, so your cost base is $ 100,000. You decide to withdraw $ 150,000 from the policy.
Your taxable distributions will be $ 50,000. 1099-R you get should look like this:
If you own a Modified Endowment Contract (MEC) you can not take a FIFO exit against the ground. So if there is a profit in the policy, you must withdraw it first. In addition, loans taken out against MEC's withdrawals from profits are counted if there are profits. <! – ->
For example, if you are 50 years old, you own an MEC that has $ 500,000 in cash with a cost base of $ 150,000 and you decide to withdraw $ 25,000 from the policy, you will have $ 25,000 in taxable distributions. 1099 should look like this:
Please note in the examples above, 1099 has a box to report coupons from your distribution.Life insurance companies will ask if you want any amount withheld for tax purposes when you take a distribution or hand over an insurance.If you choose to withhold e This amount will be displayed in these boxes (usually box 4).
The insurance company has already sent this money to the IRS, so it counts as part of the money you paid before calculating your taxes. If you paid too much in advance, you will get back the excess amount as a refund. <! – ->
Why did I get a 1099-INT?
When people cancel either for cash return or as part of a 1035 exchange, they sometimes receive a 1099-INT from the life insurance company coming tax registration time the following year. This 1099 comes in addition to the 1099-R.
1099-INT reports interest payments. This usually happens because the insurance company took longer than what was legally allowed to distribute your money. When this happens, the insurance company owes interest on the money they had for longer than legally allowed.
For example, suppose you owned an entire life policy with $ 100,000 in cash value. You request a full submission of the policy. The insurance company delays the processing and does not complete the request until after the state has allowed processing time. Because the insurance company held on to your money for longer than is permitted by state law, it owes you interest on the money. It will send this amount with cash repurchase value once the company has processed the repurchase request.
The following year, you will receive both a 1099-R that reports the distribution from your life insurance and a 1099-INT that reports interest paid after the delay in treatment. 1099 reports the interest income in box 1.
Again, since several months pass between the receipt of the funds and the arrival of these tax reporting documents, it is wise to keep detailed records of the money you received to be able to reconcile and ensure that the correct amounts appear below 1099. If the insurance company made a mistake in reporting taxable dividends or interest income received, do you want this corrected or else you are potentially liable for tax on money you never got.
Statutory interest calculations vary depending on the state. If you want to try to reconcile the insurance company's calculation and payment of interest to you, you must look up the interest payment required and the time of the interest for the country where you originally bought your life insurance. Keep in mind that this may not be the state you live in.