Reporting Life Insurance Surrender Proceeds on Your Tax Return

Which Form Covers Life Insurance Surrender Proceeds?

Life insurance surrender proceeds are reported on Form 1040, specifically in the "Other Income" section (Line 21 for 2024). If the surrender is a taxable event, you must add the taxable portion to that line. The surrender itself is not a separate form; the calculation and inclusion happen within the main return.

Determining Taxability of the Surrender

To decide what portion is taxable, compare the surrender proceeds to the policy's adjusted basis, which equals the total premiums paid minus any prior withdrawals or loans. If the proceeds exceed the adjusted basis, the excess is taxable. If they are less, the entire surrender is typically tax‑free. Keep a record of all premium payments and withdrawals to support the basis calculation.

Reporting the Amount on Form 1040

Enter the taxable amount on the "Other Income" line. If you receive a Form 1099‑R from the insurer, the taxable portion will appear on Box 2; otherwise, report the amount directly. Attach Schedule 1 (Form 1040) if the total other income exceeds the threshold that requires a separate schedule.

Key Deadlines and Penalties

All income, including life insurance surrender proceeds, must be reported by the filing deadline (usually April 15). Failing to report a taxable surrender can trigger a penalty of 20% of the unpaid tax. If you expect to owe tax, consider making an estimated payment by June 15 to avoid interest.

Common Mistakes to Avoid

• Ignoring the policy's adjusted basis and reporting the full surrender as taxable. • Forgetting to include the amount on Form 1040 when no 1099‑R is received. • Mixing up life insurance surrender with policy loans or withdrawals, which have different tax rules.