iQuanti: Life insurance can help give your loved ones financial security if you unexpectedly pass away. If you're considering getting a life insurance plan, you may be wondering if the premiums are tax deductible. Let's dive deeper into how tax deductions work, whether life insurance is tax deductible, and when life insurance premiums can be tax deductible.
How do tax deductions work?
Tax deductions are amounts of money that can be taken off your taxes and lower your taxable income. Reporting tax deductions can help you pay less in taxes each year. Some examples of common tax deductions are charitable gifts, student loan interest, and an IRA contributions deduction.
Is life insurance tax deductible?
Life insurance premiums are typically not tax deductible. This is because life insurance is considered a personal expense, and there is no state or federal mandate for getting a life insurance policy. Although you don't get a tax deduction, the death benefit of life insurance policies is usually not subject to income tax. This means that your beneficiaries can receive the death benefit tax-free if you pass away.
When can life insurance be tax deductible?
While life insurance isn't normally tax deductible, there are some exceptions. If you are a business owner and pay life insurance premiums for your employees, you may be able to claim tax deductions on those premiums. Business owners that provide life insurance as an employee benefit and aren't a beneficiary of the policy can write off the premiums as a business expense.
A few other instances where life insurance can be tax deductible is if your beneficiary is a charitable organization, or if you have an alimony agreement that went into effect before 2019 and requires you to have life insurance on behalf of your ex-spouse or child.
Life insurance tax benefits
Although life insurance is usually not tax deductible, your policy can offer other tax benefits. As mentioned earlier, your beneficiary usually won't have to pay income tax on the death benefit when they receive it. Another benefit is that the cash value of your life insurance plan (if you have permanent life insurance) can grow tax-free, which means you can accrue money faster.
If you want to take out a loan against your life insurance policy's cash value, you can borrow money without having to being taxed on it. Just keep in mind that if you withdraw more than the amount you paid in premiums, you may be taxed on the money.
The bottom line
Life insurance is a great way to provide financial support for your loved ones. There are some circumstances where you can deduct life insurance premiums on your tax return, but life insurance is often not tax deductible. Luckily, you can still get tax benefits from your life insurance policy. Consult with a tax professional to see how you can best take advantage of the tax benefits from life insurance.
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Original Source: Are Life Insurance Premiums Tax Deductible?
