Greg died on July 1, 2019, and left Lea, his wife, a $45,000 life insurance policy which she elects to receive at $9,000 per year plus interest for 5 years. In the current year, Lea receives $9,500. How much should Lea include in her gross income?
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In this scenario, the life insurance proceeds paid to Lea are typically not taxable, as they are considered a nontaxable return of principal.
However, if the policy includes interest or earnings, that portion could be taxable. Lea's taxable income is the amount of interest or earnings she receives.
Given that Lea received $9,500 in the current year, and the annual amount she elected to receive was $9,000, the difference of $500 could be considered interest or earnings. Therefore, Lea may need to include the $500 in her gross income for tax purposes.
It's advisable for Lea to consult with a tax professional or accountant to ensure proper reporting and understanding of any tax implications related to the life insurance proceeds.