Do I have to pay taxes?? Again??

Question

I have decided to cash in one of my life insurance policies. When I filled out the form they asked did I want the taxes taken out then or later. I chose for them to go ahead and take them out. Now my mom is tellin me that they will still take out more taxes come tax time b/c it is considered income. I just want to make sure this is correct..

Answer 1

Yeah, they will take out a little more taxes, but at least you won't be having to pay it all in one lump sum and can invest the money you do have.

Answer 2

I assume you do not have a loan against the whole life policy.

Only the difference between the amount you receive and the premiums you have paid is taxable to you as ordinary income. The insurance company knows how much the premiums are, and will base the withholding on a flat rate which may not correspond to your tax rate.

If you owe less tax than that, you will get a refund, if more, you will have to pay more.

You will receive a 1099R from the insurance company in January 2008 showing the distribution, the taxable amount, and the withholding. Enter this into your tax return software or take it to a preparer.

Answer 3

You may have to pay more taxes, or you may get a refund. The taxes taken out were like withholding on a paycheck. At the end of the year, you calculate your total income tax. If too much was withheld from all sources, you get a refund. If not enough was withheld, you pay the difference.

Answer 4

Any tax taken out when you pulled the money out works just like withholding from your paycheck - if more than enough was withheld, you'll get the extra refunded to you, but if not enough was taken out, you'll owe the balance.

When you prepare your tax return, you calculate your total tax liability for the year, then subtract any withholding to see if you still owe more, or if you get a refund.