20 May Taxable or Not?
We often get calls from out clients regarding money they received, wondering if it is taxable.
Some of our more common questions are:
- Life Insurance–generally life insurance proceeds are not taxable. However, if you cash out a policy, if the amount received exceeds the premiums paid, that portion may be taxable. Also, any interest received on a policy which accrued between death and distribution would be taxable.
- Inheritances–the actual bequest or inheritance usually is not taxable, unless it is a distribution from a tax deductible retirement account. Keep in mind that the earnings while the estate is open are taxable. You should receive a K-1 from the executor which tells you the character and amount of income.
- Gifts–gifts are not taxable to the recipient, though the giver may have to file a gift tax return, and in rare cases, pay a gift tax. In most reportable gift tax situations, only the Estate / Gift exclusion (technically the unified credit) is reduced for the giver.
- Damage awards–for physical injury or sickness are not taxable. However, litigation proceeds replacing lost wages or other damages, generally are taxable.
- Child support payments received–are not taxable, which also means that child support payments, are also not tax deductible. Alimony is taxable to the recipient and deductible to the payer.
- Other amounts such as social security income and state tax refunds, depends on the taxpayer situation and other income.
The tax law’s basic position is that all income is taxable, unless there is a specific exclusion.
For more information on this topic, see IRS publication 525 at:
Disclaimer: Do not rely on any of the information above without first consulting your tax advisor.