- Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them.
- However, any interest you receive is taxable and you should report it as interest received. See Topic 403 for more information about interest.
- If the policy was transferred to you for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts. There are some exceptions to this rule. Generally, you report the taxable amount based on the type of income document you receive, such as a Form 1099-INT or Form 1099-R. For additional information, see Publication 525, Taxable and Nontaxable Income.
You must report as income any amount you receive for your disability through an accident or health insurance plan paid for by your employer:
- If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that's due to your employer's payments is reported as income.
- If you pay the entire cost of a health or accident insurance plan, don't include any amounts you receive for your disability as income on your tax return.
- If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and you didn't include the amount of the premium as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.
- If the amounts are taxable, you can submit a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay to the insurance company, or make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals.
Amounts you receive from your employer while you're sick or injured are part of your salary or wages.
- Report the amount you receive on the line "Wages, salaries, tips, etc." on Form 1040, U.S. Individual Income Tax Return.
- You must include in your income sick pay from any of the following:
- A welfare fund
- A state sickness or disability fund
- An association of employers or employees
- An insurance company, if your employer paid for the plan
You can generally exclude from income payments you receive from qualified long-term care insurance contracts as reimbursement of medical expenses received for personal injury or sickness under an accident and health insurance contract. Also, you can exclude from income certain payments received under a life insurance contract on the life of a terminally or chronically ill individual (accelerated death benefits). Refer to Publication 907, Tax Highlights for Persons with Disabilities.
You may be able to deduct your out-of-pocket expenses for medical care above any reimbursements, if you're eligible to itemize your deductions. You'll need to review Publication 502, Medical and Dental Expenses.
For more information, refer to Publication 907.