The life insurance proceeds exclusion generally does

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the life insurance proceeds exclusion generally does not apply when a life insurance policy is transferred to another party for valuable consideration. In this case, the eventual life insurance proceeds collected by the purchaser are excluded up to the sum of the purchase price of the policy and any subsequent premiums with remaining proceeds taxable as ordinary income. Generally, if the owner of a life insurance policy cancels the policy and receives the cash surrender value, the taxpayer must recognize gain equal to the excess of the amount received over premiums paid on the policy (a loss is not deductible). Under the accelerated death benefits provisions, exclusion treatment is available for insured taxpayers who are either terminally ill or chronically ill. Foreign-Earned Income To be eligible for the annual exclusion, a taxpayer must have her tax home in a foreign country and (1) be considered a resident of the foreign country or (2) live in the foreign country for 330 days in a consecutive 12-month period. The exclusion, however, is limited to a maximum of 14 percent of the statutory exclusion amount (14 percent × $100,800 = $14,112 in 2015). Sickness and Injury-Related Exclusions Workers’ Compensation Taxpayers receive workers’ compensation benefits when they are unable to work because of a work- related injury. Any payments a taxpayer receives from a state-sponsored workers’ compensation plan are excluded from the taxpayer’s income.
Payments Associated with Personal Injury Any compensatory damages on account of a physical injury or physical sickness are nontaxable. Thus, damages taxpayers receive for emotional distress associated with a physical injury are excluded. In contrast, punitive damages are fully taxable, Health Care Reimbursement Any reimbursement a taxpayer receives from a health and accident insurance policy for medical expenses paid by the taxpayer during the current year is excluded from gross income. The exclusion applies regardless of whether the taxpayer, her employer, or someone else purchased the health and accident policy for the taxpayer. Generally, long-term care insurance, which covers expenses such as the cost of care in a nursing home, is treated the same as accident and health insurance benefits. Thus, the employee does not recognize income when the employer pays the premiums. Also, the individual who purchases his or her own policy can exclude the benefits from gross income. Disability Insurance The exclusion provisions for disability insurance are more restrictive than those for workers’ compensation payments or reimbursements from a health and accident insurance plan . Disability insurance, sometimes called wage replacement insurance , pays the insured individual for wages lost when the individual misses work due to injury or disability . If an individual purchases disability insurance directly, the cost of the policy is not deductible, but any disability benefits are excluded from gross income.

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