Problem understanding 1099-R and 1099-INT re life insurance proceeds.

[44Apple]

My wife's mother had a $5000 whole life policy on her. My wife's brother, who had taken over their mother's finances, took a loan of $4175 from it and did not pay it back.

After their mother died, my wife, as sole beneficiary of it, received a payout of $421.

My wife recently received a 1099-R and a 1099-INT from the insurance company re the policy.

Rounding off figures, the 1099-R has amounts of $5070 in box 1, $640 in box 2a, $40 in box 4, and $450 in box 5. Box 7 has Distribution code 7.

The 1099-INT lists $120 in box 1.

I entered all the figures on our joint Federal Turbo Tax return that I am working on. They were the last figures I entered. Before, we owed $725. After entering that 1099-R and 1099-INT, the owed amount jumped to about $850.

I don't mind filing this return but would like to know what I am looking at. None of these figures make sense to me. I thought life insurance payouts were tax free.

Would appreciate any responses from tax people out there.

Thanks.

[CoachKandSportsguy]

ERROR: The request could not be satisfied (https://nfg.com/policyholder-tax-info.html)

I am not a licensed tax professional, but I have worked with several tax professionals and have discussed various tax issues with them, so I am familiar with most of the tax concepts with filing, and file many different types of tax returns personally.

The above website describes the basic concepts of the 1099r associated with insurance or annuity distributions:

If at the time your policy lapsed there was an outstanding loan and a taxable gain, you would receive a Form 1099-R. While a policy is active, generally any cash loans or loans to pay premiums would be considered non-taxable. When a policy terminates or lapses, any outstanding loan on a policy with a gain is considered a distribution and becomes a taxable event.

The cause of the tax is the loan outstanding and unpaid interest charged on the loan. You do not present any reason for the loan, so I can't make any judgements on whether the brother took the money from your wife, or for your wife's mother.

good luck. . .

finance guy

[rjm1cc]

It seems that the 1099R belongs to her brother. I think she can show it on her tax return and offset it by issuing a 1099R to her brother with a copy to the IRS. Do some research to make sure I am correct. The insurance company was probably correct in how they handled the situation as the loan was probably to the policy holder and the policy holder loaned the money. Another possibility is you might be able to write off the loan as a bad debt investment and not involve the brother. Just some guesses that some one may comment on.