Maxine Aaronson, Attorney at Law
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Tax Newsletter

  • Eligibility for the Elderly and Disabled Tax Credit
    Certain elderly and/or disabled taxpayers may be entitled to a tax credit when filing their federal income tax return. A tax credit can be deducted from the amount of federal income tax owed, as opposed to a tax deduction, which reduces... Read more.
  • Volunteer Work and Tax Deductions
    You may be able to deduct certain expenses that are related to volunteer services offered to a qualified charitable organization. However, these services should not have been reimbursed or used for personal... Read more.
  • Reasonable Cause for Nonpayment of Income Taxes
    When a taxpayer fails to file a tax return or to pay a tax that is due, the IRS will impose a penalty. However, a taxpayer will be excused from paying the penalty for failure to file or pay if he or she shows that there was reasonable... Read more.
  • Mischaracterization of Divorce Payments as Alimony
    Most divorces involve a division of property between the spouses. If there are children from the marriage, the parent not granted custody usually must pay monthly child support. In addition, one of the spouses may be granted monthly... Read more.
Tax News Links

Tax Implications of 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.