by starrhawk88 » Mon Aug 16, 2010 02:27 pm
The life insurnace policies are both under $20K. She files current taxes every year and the IRS sends a form showing back taxes owed but in the same letter states they arwe uncollectable.
Posted: Thu Aug 19, 2010 03:41 am Post Subject:
IRS is contacting you regarding the life insurance policies? There's only one scenario that could make this possible. There would have to be enough cash in the policies to have failed either the Cash Value Accumulation Test (CVAT) or Guideline Premium Test (GPT). It's one or the other, if whole life it's almost certainly the CVAT (but failing it on a whole life policy is extremely rare) if universal life it could be either or.
Any way, if failure the test to qualify as life insurance occurs, then the tax deferred earnings on life insurance goes away, and the contract is reclassified as an investment. Tax treatment is like that of a regular investment brokerage account, or CD--taxes due on gains every year.
Posted: Thu Aug 19, 2010 03:44 am Post Subject:
Actually, now that I think of it, there are potentially a few other scenarios that could create a taxable situation.
She has pulled money out of the contracts beyond her cost basis and this created a taxable event.
She has received a dividend as cash, which could be a taxable event.
She has contracts that are actually Modfied Endowment Contrats and she has taken money out of them, which will cause a taxable event so long as their is a taxable gain on the cash value.
Her policy pays dividends and she has chosen the dividend option to grow at interest, rather than purchase paid up additions, the interest paid on the account receiving the dividends is taxable.
Posted: Fri Sep 10, 2010 01:17 pm Post Subject:
I'm sure she has everything mentioned in the policy papers. When she collected the cash dividends, she must have known that they're taxable.
Posted: Fri Sep 10, 2010 05:18 pm Post Subject:
the IRS sends a form showing back taxes owed but in the same letter states they arwe uncollectable.
Don't overlook the obvious . . . the back taxes probably have NOTHING to do with the life insurance.
$20,000 policies? Not going to be UL or VUL -- the two most likely to be subject to becoming a MEC. Pulling out more than the cost basis -- never going to happen in a WL policy. Term? End of discussion.
Taxable dividends? Never. Not the dividends themselves, but possibly the amount of interest generated by them. But again, what are the premiums going to be on a couple of $20,000 policies? $15-$20 per month each? Annual dividends might be $50-$100 per policy. At 3% interest, that's only going to generate $3 at most. $6 total is not even reportable to the IRS.
So, again, the obvious is that back taxes are owed for some other reason, like failure to pay, being underwithheld, disallowed deductions.
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