If you have a family or loved ones that you want to take care of after you pass away, it’s likely that you currently carry some type of life insurance policy. This may be a policy that is structured as a whole plan or a temporary plan, and with that plan, you probably pay a sizable premium each month. In some cases, you may end up paying hundreds of dollars on a monthly basis to ensure that your policy is up-to-date. As someone who looks for ways to lower their financial burdens, you may be thinking that it might be possible to write off your life insurance payments on your taxes. The IRS is clear on their stance of allowing this tax deduction.
Claiming Life Insurance Payments As Tax Deductions
Unfortunately, the IRS does not allow business owners or private citizens to claim life insurance payments as tax deductions. The reason for this is because most life insurance beneficiaries do not have to pay taxes when they receive benefits. If the IRS provided a tax break for policyholders, it would be redundant. You can compare life insurance policy functions to a Roth IRA — when premium contributions are made, they cannot be subtracted from the taxable income of a policyholder as their benefits grow on a basis that’s tax-free.
Taxable Situations For Life Insurance Benefits
There are only a few specific situations where the benefits of a person’s life insurance would be taxable. For example, if a business were to purchase the life insurance policy of an individual and use it for investment purposes, they may be required to cover the cost of taxes on any proceeds that may occur.
In this unique circumstance, the principle of the business may have the ability to claim a business expense by using the premiums being paid for the policy. If the results of the policy end with a payout, proceeds would be considered similar to capital gains and taxed at a similar rate. However, if the expiration of the policy occurs and a payout has not been issued, the principal may have to return funds related to the deducted premiums entire taxable value. This type of situation is usually best handled by hiring a professional who handles questions related to the tax code.
Taxable Situations For Larger Groups
Another situation where a life insurance plan may be taxable is when you receive benefits related to an employer-sponsored group term life insurance plan. In this situation, you may be required to pay taxes that are related to contributions you made. In addition, the beneficiary of the policy will have to cover the cost of taxes that are related to death benefits exceeding a $50,000 payout limit. For example, if a policy disperses benefits equal to $200,000, a $150,000 tax liability will be incurred by your beneficiary.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!