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My 85 year old mother is having to cash out a life ...

Sent to Tax Experts August 4 2006 at 8:18 AM
   

My 85 year old mother is having to cash out a life insurance policy for about 20k for rest home care. Her only other income is SS and she has no other assets . How is the best way to handle this? What would be the tax issues? My name is on her bank account, how would this affect me? Thanks for any help.

 

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August 4 2006 at 8:24 AM (6 minutes and 25 seconds later)
         
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Is her filing status single? Does she have any dependents? How much in social security does she get?

Is 20K the amount that she is going to get out of her policy? what is the taxable amount out of this $20K? see below for explanation....

If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.

Let me know if you have any question.

renu@yashcon.com

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.

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RD -- Certified Public Accountant (CPA) -- 99% Positive Feedback on 4850 Tax Accepts
CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
Reply
August 4 2006 at 10:50 AM (2 hours and 25 minutes and 43 seconds later)
         
Reply to Renu V's Post: Being a widow,with no dependents,she would be filing single. Has not had to file for many years due to age and low income.

This is a participating Paid-Up Life Insurance policyI was informed by the company that approx.20.K is the cash out amount.She received small dividends for a few years,but had an unpaid loan, which has now been settled with the company. Dividends when alloted are applied as additional paid-up insurance. She no longer has to pay premiums.
Customer (name blocked for privacy)
Answer
August 4 2006 at 1:13 PM (2 hours and 23 minutes and 13 seconds later)
         
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Can you find out from the insurance company, how much is the taxable income from the cash out amount that she will be receiving.....they may be able to help you... (once taxable portion is determined.....I can provide you information on the tax liability)

Generally, if Social Security is your only income, your benefits are not taxable, and you probably do not need to file a federal income tax return.

From the Internal Revenue Service's standpoint, Social Security benefits include monthly survivor and disability benefits, but not supplemental security income payments, which are not taxable.

But if you collect other income in addition to Social Security, you could owe taxes on at least a portion of your government benefits.

For a quick computation of your potential tax liability, add one-half of your Social Security benefits to all your other income.

In this calculation, you also must take into account any tax-exempt interest you earned, as well as exclusions from income such as savings bond interest, work-provided adoption benefits or foreign-earned income.

If this amount is greater than the base amount for your filing status, a part of your benefits will be taxable.

The base amounts for figuring possible tax liability on benefits are:

$25,000 for single, head of household, or qualifying widow or widower with a dependent child.
$25,000 for married individuals filing separately and who did not live with their spouses at any time during the year.
$32,000 for married couples filing jointly.
Zero for married persons filing separately who lived together.

Generally, up to half of your benefits will be taxed if you exceed the base amounts. However, up to 85 percent of your benefits could be taxed if your income plus half of your Social Security checks exceed $34,000 if you are a single filer or $44,000 if you are married and file jointly.

You'll need to complete the work sheet found in your Form 1040 or 1040A instruction book (or in your tax software package) to find out the exact amount.

As far as you are concerned.....you will not owe any tax on account of this receipt. Having you name on her bank account does not make you liable for the tax liability.

Let me know if you have any question.

renu@yashcon.com

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.


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RD -- Certified Public Accountant (CPA) -- 99% Positive Feedback on 4850 Tax Accepts
CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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