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Question for the Money Doctors

Question submitted on Feb 2, 2014.

Question

Hi,

I hope you can offer some advice. I recently had a death in the family and am the beneficiary of a life insurance policy in which I received a lump sum payment. This was several months ago. I elected to have 10% of the taxable income amount withheld? But, I now understand that life insurance proceeds are not taxable. This happened in the State of New York and I now live in CA. Does this make a difference? I was distraught when I signed the papers and now worry that I have no recourse to get this money back. DO you have advice in this situation. Thanks in advance.

Answer

Hi, I am sorry for your loss. You are correct, life insurance proceeds are typically not taxable (income tax). I am not sure why the insurance company had you withhold 10%. You should make sure that it was in fact a life insurance policy and not an annuity. Annuities are held at life insurance companies, but they are taxed differently. If it was an annuity, then all or part of it may be taxable. If it was a life insurance policy, then you should get the funds back when you file your income taxes. Withholdings are sent to the treasury department on your behalf (similar to the funds withheld from a paycheck), but if you have overpaid; then you will get a refund from the IRS. I hope this helps.


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