Identifying Types of Insurance Proceeds

Insurance proceeds are the funds or payments resulting from a covered claim or event. These include various scenarios, including life insurance benefits, health insurance reimbursements, casualty claims, and property settlements. Each scenario can take different forms. For example, you may receive proceeds from a property insurance claim for repairs or to replace a severely damaged property. Proceeds from various types of insurance settlements may include:

• Life insurance proceeds: Life insurance gives beneficiaries a death benefit to cover income gaps after losing a loved one.
• Disability insurance proceeds: The settlement from disability insurance serves as income replacement.
• Health insurance proceeds: These proceeds cover your medical expenses, which include surgeries, hospital stays, and prescription medication.
• Property insurance proceeds: Property insurance helps cover property damage or loss and includes homeowners or renters insurance.
• Business insurance proceeds: Much of this insurance type aims to cover a temporary loss of profit.

Life Insurance Proceeds

Both term and permanent life insurance proceeds are not classified as gross income, so beneficiaries are not obligated to report them. However, if the policyholder receives their death benefits while they are alive, like with a settlement, they may be liable to pay taxes. The interest you receive from these proceeds is also taxable, and how you will report this depends on the type of income document you receive.

Large estates may trigger federal or state estate taxes. For estate tax purposes, the life insurance proceeds often form part of the deceased person’s estate in these cases. This may change the nature of the payment and can trigger taxation.

Disability Insurance Proceeds

The proceeds from your disability insurance replace a portion of your income if you cannot fulfill employment obligations. Taxation depends on whether you paid premiums using your pre-tax or after-tax dollars. Regardless, you must report all proceeds from disability insurance as income. If your employer pays you when you are ill or injured, this forms part of your income.

Health Insurance Proceeds

Health insurance proceeds are not taxable unless you deduct medical expenses on your tax return. Receiving an insurance reimbursement for these expenses can invoke tax implications, whether you are on private or employer-sponsored health plans. The benefits you receive from long-term care insurance policies may be subject to certain conditions and limitations, but they are not taxable. Keeping records of all your insurance reimbursements and medical expenses for tax purposes may support your case to avoid taxation.

Property Insurance Proceeds

The Internal Revenue Service (IRS) excludes settlements for property loss or value from taxable incomes. The result is that insurance proceeds for property damage are not taxable unless the settlement includes compensation for punitive damages or emotional distress. You must report these as “other income” on Schedule 1, line 8z on Form 1040, under “Additional Income and Adjustments.”

Another exception is if the settlement you get exceeds the restoration cost, which classifies the proceeds as capital gains, opening it up to taxation. If you get a Form 1099 for your insurance proceeds, review the form to establish if it is accurate. Contact the issuer to correct any errors or discrepancies.

Business Insurance Proceeds

Your business insurance shields you against personal injury lawsuits and business losses like property damage. As long as the reimbursement you get from filing an insurance claim does not surpass the value of the loss, insurance proceeds are not taxable to a business. Casualty loss insurance proceeds for business property damage are not taxable either. If your insurance fails to cover the loss, you can likely deduct the loss against your business income.

Here are some other types of business insurance proceeds and whether you can claim them tax-free:

• Business interruption insurance: This insurance compensates for lost income and is often considered taxable income.
• Key person life insurance: When your business is the beneficiary of a key person life insurance policy, the proceeds are tax-free. However, the policy structure or other circumstances may change the nature of this settlement to see it as an income.
• Liability insurance: If the proceeds of your liability insurance compensate for a loss, it is often deductible as a business expense. As a result, those proceeds may be taxable.
• Employee benefits: In many cases, the insurance benefits for your employees are tax-deductible, and the employees receive these benefits tax-free.

How to Tell if Your Insurance Proceeds Are Taxable

Several general principles influence the potential taxation of your insurance proceeds. Keep all documents from your insurance company for your records, even if the proceeds are not taxable. Consult a professional to clarify whether you must file insurance proceeds with your income taxes.

• Capital vs. income: Generally, you can distinguish taxation based on capital versus income replacement. Insurance proceeds that replace lost income may be subject to income tax. Proceeds resulting from the capital loss, like property insurance payouts for damage, may not be subject to taxation.
• Deductibility and premiums: The premiums you pay for personal insurance, like disability, health, or life insurance, with your after-tax dollars will usually be tax-free. However, those you pay for with after-tax dollars, like employer-sponsored plans, may result in taxation.
• Legal judgment: If you receive proceeds resulting from legal judgments or settlements, these may also be liable for taxation. Factors that may impact this include the nature of your claim and whether it involves emotional distress or personal injury.

Manage Your Insurance Proceeds With Fort Pitt Capital Group

You can optimize your financial outcomes by understanding how your payout fits the relevant tax laws. You will also need to follow some specific accounting procedures, including the total amount of the proceeds and loss. Getting advice from a knowledgeable financial advisor and investment strategist on allocating your insurance proceeds ensures you prioritize your wealth preservation.

The knowledgeable team at Fort Pitt Capital Group can help. Our financial services include wealth management, insurance advisory, investment consulting, and more. For more information about our financial planning and portfolio management services, contact us online today, or call us at 1-800-471-5827.

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When you retire, your daily routine will change, as will many parts of your life. However, one thing that remains consistent is the need to pay taxes. To hold onto as much of your retirement savings as possible, you’ll have to be strategic. The first step is to know the tax implications of retirement and whether retirement funds are taxable.

Taxable Income Streams in Retirement

A key area of retirement planning is ensuring your income matches your expenses in the years you are no longer working. Many individuals often overlook the expense of taxes and how it impacts your retirement income.

If you decide to work in retirement, you will pay taxes on your income. In addition, many of your retirement income streams may be taxable:

• Social Security: Depending on whether you’re married and how much you earn, you may need to pay taxes on part of your Social Security payments. Some or most of your benefits are subject to tax if you’re single with provisional income in excess of $25,000 or married-filing-jointly with an income over $32,000.
• Pensions: You will generally need to pay taxes on your pensions, but some types, like disability and military pensions, may be tax-free or partially tax-free. Also, some states do not tax pensions, so you may receive some tax benefits if you move after retirement.
• Annuities: Like pensions, some annuity benefits may be taxable. Qualified annuity payments are taxable because you haven’t previously paid taxes on that income stream.
• Tax-deferred investments: Once you start to use your assets from an IRA, 403(b), 401(k), or another tax-deferred retirement account, you will owe taxes on any amount you withdraw. You may owe less if you remove only part of the amount, so a good retirement funds withdrawal strategy is essential.
• Investments: Many retirees want to liquidate assets or use dividends and interest from investments to fund their retirement. However, some investments require a capital gains tax payment, which can range from 0-20%, depending on your income tax bracket. You need to pay taxes on stocks, bonds, mutual funds and other taxable investment accounts the same in retirement as in pre-retirement.
• Life insurance cash values: You can withdraw the cash surrender values of life insurance policies tax-free by first accessing premiums paid. From there, you can access the remaining cash on a loan basis, tax-free. However, remember that accessing the cash value reduces the payout amount upon death. In addition, if cumulative loan interest exceeds the current policy cash value, the policy lapses. A lapsed policy means no life insurance protection and the likelihood of income tax.

Retirement and Taxes Strategy

You’re responsible for paying taxes on your retirement income, which may differ from your pre-retirement years. Also, in retirement, your cash flow may be more than your working years, but your tax reduction opportunities are less. Therefore, failing to plan and account for taxes can significantly impact your retirement assets.

You can minimize your tax burden when you retire by taking several steps:

• Think strategically: As you decide where you’ll live after retirement and how you’ll replace your income, consider the tax implications. Determine how much you could save by moving states or adjusting your plans.
• Consider gains and losses: You may be able to offset some capital gains taxes on some investments by using capital losses on others.
• Look into credits and benefits: Work with an advisor who can help you take advantage of any tax credits and deductions you may qualify for.
• Consider ways to reduce capital gains taxes: You may be able to make a charitable gift of some assets, creating a tax deduction.
• Implement a withdrawal strategy: Where possible, manage your taxes by keeping your income within the lowest tax bracket. Start withdrawals from taxable accounts. which enables tax-deferred retirement accounts to build in a tax-advantaged way. You can also use income streams already taxed, such as dividends. An advisor can devise an effective withdrawal strategy for you.

Reach Out to an Advisor Today

There are many ways to reduce your tax burden after retirement. Concepts such as income bunching, retirement account conversions, and distribution timing are just a few options. Consult an advisor to determine the best way to maximize your finances.

You can speak with an advisor at Fort Pitt Capital to learn how to hold onto your retirement income. Our wealth management, financial advisory, and portfolio management services have been helping retirees since 1995. You’ll appreciate our transparency, exceptional client service, customized investment strategy, and industry expertise.

*Fort Pitt does not provide tax advice but encourages you to consult a tax professional before making any decisions.

Learn more about our services to see how we can help you.

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When can I expect to receive my 1099 and other tax documents?

Custodians will begin mailing a 1099 and year-end summary for all taxable accounts in mid-February 2017. This document will detail the realized gain and loss information for each taxable account, as well as any distributions that may have been taken. Management fees for 2016 will also be listed, should you wish to include this information on your tax return.

For retirement and education savings accounts taking distributions, a 1099-R or 1099-Q will be mailed in mid-to late January 2017. If applicable, this document will also detail the total amount withheld for taxes from your distributions.

What should I do if I don’t receive this information in the mail? 

The custodians also make your tax information available online. If you don’t receive the documents in the mail or would like to access them without waiting for the postal service, you can log into your account online through the custodian’s website. If you need to set up online access for your accounts, please refer to the following links for Charles Schwab, Fidelity, and TD Ameritrade.

• Schwab: http://www.schwab.com/public/schwab/nn/pl_help/online_enrollment_help.html
• Fidelity: https://www.fidelity.com/customer-service/faqs-managing-your-profile
• TD:  https://www.tdameritrade.com/logon-help.page

Please note, the documents will not be available online until mid- to late February 2017. Accessing them online will simply allow you to view the documents before they arrive in your mailbox.

What’s the deal with revised 1099s?

A revised 1099 can be issued by the custodian for a variety of reasons up until the tax deadline in April. In an effort to lower your chances of having to file an amended tax return, please wait as long as possible to file your taxes. If you do receive a revised 1099, we strongly advise you to consult with your tax preparer to determine whether or not it is necessary to file an amended tax return.

Even though this year’s April 18 deadline gives you a few extra days to file, we don’t recommend procrastinating! If you have any questions, reach out to your financial advisor or tax preparer prior to the deadline.

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Tip: It is important that you check with your CPA/Accountant first to see if you are still eligible (due to the income limits) to make a Roth IRA contribution for the specified tax year. It is a good idea to take a look in January, at the Income Contribution Limit tables that the IRS puts out each year. These tables identify single filers, joint filers, head of households, etc. and the range of income that each can potentially earn to make a full contribution, partial contribution or no contribution.

If you’re eligible to contribute to a Roth (if you and your spouse file jointly and have taxable compensation and are below the IRS’s income limits), you may want to take advantage of that because one of the benefits of this type of IRA is that the earnings on your contributions come out tax free. That is, as long as it is a qualified distribution, meaning that it has been at least 5 years since you established and contributed to a Roth IRA and you are at least age 59 ½ at the time of the distribution.  But, before you make the final decision to contribute to a Roth, it is important that you do your own due diligence as well as consult with a tax advisor regarding your Modified Adjusted Gross Income (MAGI).

For your reference, I have included a link below to the IRS’s 2017 and 2016 Income Limit Tables.

2017 Roth IRA Contribution Income Limits

2016 Roth IRA Contribution Income Limits

2016 & 2017 Roth IRA Total Contribution Amounts – $5,500 (under 50)/$6,500 age 50 or older

Fort Pitt does not provide tax advice. We encourage you to contact your tax professional with any questions.

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Start by figuring out and understanding your current effective tax rates and if you have any carry forward losses from previous tax years. Events like Brexit, or an election, can cause market volatility. If an opportunity presents itself and you’re aware of where you stand by planning ahead, you give yourself and your investment advisor an advantage. Early planning allows you to execute in a much more efficient manner rather than experiencing the market move and then trying to determine how to react. By then, opportunities may already have passed.

Also, it is equally as important for both those with earned income and retirees to consider their current tax bracket. Often, people fail to realize they’re approaching the next marginal bracket, and with some simple planning, they can avoid entering a higher bracket by reducing their income. Below I’d like to share four ways to plan now and avoid scrambling later.

1. Accelerating deductions. There are a few ways investors can do this; whether it’s contributing to retirement plans or shifting high income producing assets to other family members. Accelerating deductions into a current tax year can be beneficial.

Shifting assets is also very common in tax preparation. Whether it’s grandparents to children, parents to children, etc., taking a look at investments that pay a very high income stream and the tax ramifications of shifting that to a family member is all part of a gifting strategy that may help to reduce overall federal tax.

2. Tax loss harvesting. Look at investment income as well as capital gains. The highest rate for those in the top tax bracket is 20 percent, which could potentially include an additional 3.8 percent for some taxpayers. So, between now and year-end, look at some traditional tax loss harvesting strategies to offset gains versus losses and reduce that amount as much as possible.

3. Charitable gifting account. Planning now for potential gifting using formal charitable gifting accounts is important. It takes time to get these accounts established. The custodians that administer the accounts have cutoff periods towards year-end. Therefore, if you wait until the last minute to establish the account, you may run out of time to execute.

You can establish the account now and make contributions between now and year-end to receive a deduction. The charitable gifting account provides flexibility by allowing you to control the timing of distributions to the charity. You can distribute funds immediately, wait to build up a pool of assets or delay giving the gift until you decide what charities you want to support.

4. Contributing to retirement. When in doubt, contribute to retirement. If you’re someone who turned 50 recently you may be eligible for a catch up contribution. Maximizing contributions to tax-deferred accounts will help offset tax liability for that calendar year.

Fort Pitt does not provide tax advice. We encourage you to contact your tax professional with any questions.

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