CHEAT SHEET 3 - Insurance taxation: Premiums. Generally a...

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Insurance taxation: Premiums. Generally a personal expense- not deductible. Conditions exist that may be deductible. Premiums paid for medical expense and qualified long term insurance are deductible to extent that they and family medical expenses exceed 7.5 percent of the taxpayersadjusted gross income a high hurdle. For CHARITY premiums paid to fund a life insurance are considered as Charity deductible and premiums paid for life and health under An alimony agreement may be deductible as alimony payment. Premiums paid for protections to benefit employees are deductible as business expense. LTC are further indexed to inflation. SECTION 101 a1 establishes the general rule that life insurance death proceeds are exempt from federal income tax. Proceeds mst be paid “by reason of the insured” meaning the insured death must have caused the maturity of the contract. Annuities paid at the time of death that were to be paid during the lifetime are NOT considered as DEATH proceeds. EXEMptions Transfer of value rule . If a insurance policy or any interest in a policy is a transferred to another person for a valuable consideration death proceeds can lose their taxexempts status in a whole or in part. The excess of gross death proceeds over the consideration paid plus net premium paid would be taxable to the beneficiary as ordinary income. EXEMPTIONS to Transfer of value: wen transfer is to the insurrd. When the transfer is to a partner of the insured a partnership in which the insured is a partner or corporation in which the insured is an officer or shareholder. Transfer that dono involve atax basis change. 7702 contains definition of life insurance for purposes of determing whether a policy qualifies for favorable tax treatment. Cash value ACCUMILIATIOn TEST requires that the cash surrender value cannot at any time exceed the net single premium required to fund future contract benefits. Netsinlge premium calc using interest greater than 4%. Guidelince sing premium is computed using interest 6% or rate garuanteed in the contract. Cash value corridor is met if the policy death benefit at all times is atleast equal to certain percentage multiples of cash value. Tefra provided definition of life insurance for flexible premium products and the taxation of annuities was modified to reduce incentives for their use as short term investments vehicles. Consequences of failing test . Cash value is taxed as ordinary income. Death proceeds, the net amount at risk is exempt from taxation because of preceding statement. If fail at any time, go back and recompute prior years taxes. Responsibility of Company. MEC (modified endowment contract) is alife insurance policy entered into after jun 20 1988. Treatment=Still qualifies as Life insurance but living proceeds are taxed more like annuity. Cash surrender proceeds : Gross Proceeds less cost basis is taxed as ord. income Cost basis is premiums paid less dividends. COST BASIS of a life insurance contract normally is the sum of the premiums paid less the sum of any dividends
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CHEAT SHEET 3 - Insurance taxation: Premiums. Generally a...

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