Overpaid Life Insurance

Today TaxMama® hears from Kresha in the TaxQuips Forum, with this problem.  “My friend received a 1099-Misc for money from a life insurance company. They said they overpaid her when her husband died, but didn’t supply any proof; nor did she send any money back to them. Now she has received a 1099-Misc – box 7 non-employee compensation for the overpaid amount. This would cause her to not only pay tax, but self-employment tax as well. Neither she nor her deceased husband did any sort of work for this money.
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Dear Kresha,

Bill Porter, of Pride Tax Preparation in Minnesota provides detailed instructions about how to handle the reporting of this. You can read the details here. Most importantly, he says, “If she is positive that there was NO ‘overpayment’, she should try to talk to a supervisor at the insurance company to try to get it sorted out.”

TaxMama adds this guidance. First, put the tax return on extension. Next, send a certified or registered letter to the insurance company, with copies to the supervisor and the president of the company. (You can generally find the president and address on the stockholder part of the website.
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Politely, but firmly, request a detailed explanation of the computation of the payment – and why they believe there was an overpayment.

Thirdly, if there was, in fact, an overpayment, it would be in the nature of investment income – dividends or interest. Not self-employment compensation. Request a corrected 1099-MISC. It will take them a couple of months to address this.
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But copying the president will speed up the matter. If you don’t get a reply by August, file your tax return.
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Keep all the correspondence and proof of delivery to the company in that year’s tax file, with a copy in your life insurance file, as well.

Bill is right about another thing – it’s not likely that anything is taxable. Life insurance proceeds tend not to be taxable.

And remember, you can find answers to all kinds of questions about odd income and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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