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Tax Talk with George Saenz

Ask the tax adviser

Taxes on a cashed-in policy

Dear Tax Talk:
I purchased a $50,000 whole life insurance policy 17 years ago. I paid $12,000 upfront so the premium payment would be deducted from the accrued interest. It now has a $21,000 cash value. If I cash it in now, how will taxes affect this amount? Will the $12,000 invested be deducted from the total? Or will it be subject to tax also? What rate will the tax be?

Dear Charles:
Although your $12,000 investment has not grown by much, at least it has paid for the premiums on $50,000 in life insurance that you fortunately didn't need.

The difference between the cash value of the policy and your original investment is ordinary income. The ordinary income tax rates in 2002 and 2003 range from 10 percent to 38.6 percent; they are scheduled to drop slightly again in 2004.

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The insurance company will issue you a Form 1099-R, reporting the surrender of the policy and the amount received.

If they have really good accounting records, they'll show the taxable amount on the 1099-R. This amount gets reported on line 16b of your individual return for the year you surrender the policy.

-- Posted: Jan. 30, 2003

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