Tax Newsletter

• What Are The Penalties For Not Filing Your Tax Return On Time?
  Many taxpayers at one time or another find themselves in a situation where they either did not file their Federal Income Tax return on time and/or filed their tax return without making the necessary payment for the tax year covered. In... Read more.
• Tax Consequences When a Marital Settlement Agreement Requires Life Insurance
  Many marital settlement agreements require one party to maintain a life insurance policy on his or her life naming the former spouse as the primary beneficiary. While this provides some financial security for the former spouse, it may... Read more.
• Can You Deduct Expenses Related to Gifts?
  If you give business gifts either directly or indirectly to clients or potential clients, you may be able to deduct some or all of the cost of the gifts. Business gifts that may typically be characterized as entertainment... Read more.
• Obtaining Tax Relief Through the Innocent Spouse Doctrine
  Many married couples file joint tax returns to take advantage of certain benefits offered by this filing status. This may result in the unfortunate and unintended consequence of one spouse being held responsible for the underreporting... Read more.

• Pay taxes like the millionaire you (probably) are!
• Billionaire Space Race Tax Proposed By House Democrat
• The first child tax credit payments go out to 65 million kids this week. How to navigate the process
• Election Commission votes to settle last fall’s lawsuit with petition group over anti-tax referendum
• U.S. Proposal for 15% Global Minimum Tax Wins Support From 130 Countries

You Must Pay Taxes on Life Insurance Proceeds

A common misconception about life insurance is that it is “tax-free.” While the build up in cash value of a life insurance policy is typically not subject to any income tax, the death benefit payable on the policy may be used for the purposes of calculating any estate taxes that may be owed upon your death.

The key to whether this happens is ownership. If you own a policy at the time of your death, or have retained any ownership rights in the policy, the full amount of the life insurance proceeds will be included in the calculation of the taxable estate.

Example

If you die owning three life insurance policies with a death benefit of $2,000,000 each (assuming they are your only assets), and the applicable unified credit for estate and gift taxes in the year of death is $5,250,000, your taxable estate would be $750,000, with taxes owed up to 40%, or $300,000.

ILITs & Taxation

An attractive option to avoid taxation calculations based on the death benefit is to create an Irrevocable Life Insurance Trust (ILIT) to own your life insurance policies. Policies owned by an ILIT may be excluded from your taxable estate.

Planning ahead is critical. If you already own life insurance, you must create an ILIT and transfer ownership in your life insurance policies to the ILIT at least 36 months prior to your death. Otherwise, the death benefit may be includable in your taxable estate.

Your tax attorney or estate planning attorney can advise you about this important option.

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