Are life insurance premiums tax deductible? The answer is a general “no”, life insurance is no considered a deductible expense on the individual tax form. This is because life insurance policies that are based on personal contributions are considered personal expenses and therefore are not considered deductible for the purposes of your taxes. Even if the premiums by you, your employer or someone else, they are still not considered deductible. That is also true if the insurance is government or commercial as well.
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The reason for this is a rather simple one. Since the money used to pay the taxes comes from after-tax income, it can then be sent straight to the beneficiary without being taxed again. This avoidance of double taxation over the same income is the core of what life insurance is all about.
For example, if you were to take out a $100,000 life insurance policy on yourself, the payments you make will come from money that you have already paid taxes on which have already been subject to different types of deductions. Therefore, since you have already had the opportunity to pay such deductions, it does not apply to your life insurance policy.
So, when it comes to the question of is life insurance tax deductible for individuals, the answer is basically no. However, there are certain exceptions to this rule that savvy tax payers can use if they have policies which qualify under the system.
Qualifications for Tax Deductions of Life Insurance Premium Payments:
There are several deductions out there for those who pay life insurance premiums, but they exist under special circumstances and will need to be reviewed first before actually taking them as a deduction. Here are some of the exceptions to the general rule.
Ownership of a C Corporation: If you own a company that falls under the definition of C Corporation in the tax code, then you may deduct the premiums for life insurance that you pay for yourself and any employers in your company. This is because premium payments in this case are considered a business expense, so you can in this particular circumstance use such payments as tax deductions. They will need to be filed as such with the proper records so that they can be verified.
This also applies to group life insurance coverage that falls under a C Corporation standing. In this regard, the tax deduction is limited to the overall cost of $50,000 of coverage. A business may take deductions of that amount, but not to any that is paid in excess of the $50,000 limitation. This is because the excess is included in the income and therefore subject to social security and Medicare taxes which are not considered tax deductible.
For example, if your run a company that consists of yourself and nineteen other employees and it falls under the C Corporation provision of the tax code, you can have a group life insurance policy that covers you and your employees up to $50,000 each and the premium payments that are made will be considered a business expense and subject to a tax deduction.
Alimony: Here, alimony payments that are secured through paying premiums on a life insurance policy may be tax deductible. This is because in certain divorce cases protection of the alimony payments are required which means that a life insurance policy is taken out in case something happens to the spouse that is paying the alimony. In this case, the person paying the life insurance premiums can use them as a tax deduction if it is for a policy to cover alimony payments.
For example, if you have a divorce agreement that state you will pay X amount of money over a pre-determined period of time that will add up to X amount, a life insurance policy can be written to make your ex-spouse the beneficiary and will pay the rest of the alimony in case something should happen to you. The premium payments you make are considered the same as alimony payments and are therefore tax deductible.
Charitable Contributions: One way that people donate to charities is through taking out a life insurance policy that ensures the qualified charity in question will receive full payment if something should happen to the person making the contributions. In this instance, the payments can be considered tax deductible as they fall under the charity deduction in the tax code.
For example, if you create a life insurance policy that names a recognized charitable organization as the beneficiary to the policy, then the payments you make are considered a contribution to a charity which means that under the current tax code it is deductible.
Interests on Prepaid Life Insurance Premiums: Any value of prepaid life insurance policies, annuity premiums or deposit funds created by premiums does qualify as taxable income. This means that the life insurance payments tax deductible status is present and can be used according to the tax code itself. This may seem a little confusing at first, but essentially the interest that is earn on policies is considered taxable income. Any income that is taxable is going to be subject to some form of tax deduction. However, the rules can be a little complicated as it depends on how much is earned by this process. You will need to discuss the particulars of this type of life insurance tax deductible with a tax professional.
Review Information with a Tax Professional:
For those who are trying to find a life insurance premium tax deductible, it is important to review all of this information with a tax professional. While there are specific guidelines in the tax code that allows for certain deductions, clarification can only come from a professional who is familiar with the tax code and the IRS which administers the process.
Read here about Paying Taxes on Life Insurance Death Benefits
Life insurance and tax deductible income are not entirely two separate issues, but there are important connections that you will want to explore in case they fall within the exceptions to the general rule.