Are Proceeds From Life Insurance Taxable

Larry Villano, Publisher of Loopholelewy.com

Maybe.

Generally, life insurance proceeds are not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.

There is no hard and fast rule as to what type of income is or is not taxable. It simply depends on the law. The IRS says all income is taxable "unless the law specifically excludes it."

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Compensatory damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses
  • State income tax refunds if the refund is from a tax year that you claimed the standard deduction. For example, if you claimed the standard deduction in 2012 and in 2013 you received a refund for state income tax withheld in 2012, the refund is not taxable on your 2013 return.
  • Debts discharged through bankruptcy are not considered taxable income
  • Cancellation of debt on a principal residence up to $2 million (in effect for the periods 2007 through January 1, 2014). The Mortgage Debt Relief Act of 2007 was set to expire after January 1, 2014 unless Congress extends it once again.
  • Restitution payments to Holocaust victims as well as payments received by their estates or their heirs

Find out more about what constitutes income.