Federal Tax Considerations for Life Insurance and Annuities
How does classification as a modified endowment contract change the taxation of cash value increases taken out?
Answer and explanation
Answer: B. A modified endowment contract keeps the deferral on accrual but reverses the ordering of distributions, so gain comes out first and a ten per cent additional tax may apply before age fifty-nine and a half. Loans from such a contract are treated as distributions too.Source: 26 U.S.C. § 72 — 26 U.S.C. § 72, § 7702A
More federal tax considerations for life insurance and annuities questions
- How are increases in the cash value of a life insurance policy treated while the policy stays in force?
- How are policy loans from a life insurance contract that is not a modified endowment contract generally treated for income tax?
- How is the interest an individual pays on personal policy loans generally treated?
- On what basis are dividends paid under a participating whole life policy?
- What is the tax effect of a properly executed section 1035 exchange?
- When a permanent policy is surrendered for cash, how is the taxable portion of the surrender proceeds calculated?
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