How do life insurance payouts and taxes work?
How do life insurance payouts and taxes work? My father died in February. I am helping my mother through the mounds of paperwork dealing with life insurance, taxes, etc. regarding her loss of a husband and also in hopes to help her better plan her future. Today's question: is the life insurance payout she received for her husband's death subject to taxes? I've advised she talk with her attorney, insurance rep -- it is Sunday and she is hoping for an answer today.
Life insurance proceeds are not subject to income taxes, but they are potentially subject to estate taxes if the deceased person owned his policy. If someone else, such as your mother or a trust owned the policy instead of merely being the beneficiary, there would not be any estate taxes. However, even if the insurance proceeds are potentially subject to estate taxes, the Federal Estate Tax does not apply unless the entire estate is more than 3.5 million dollars. Some states also have their own state estate taxes that may also apply.
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