Is My Life Insurance Policy Premium Tax Deductible?
If you are an individual purchasing life insurance for yourself, the premiums for such an insurance would not be deductible in your personal tax filings. However, your life insurance premiums may be tax deductible for your employer if the employer pays for the insurance and the insurance policy can be justified as a business expense.
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Medical and Dental Premiums
With certain limitations, IRS rules allow individual filers to deduct medical and dental expenses from their taxable income. Most individuals do not pay the entire cost of a medical or dental operation out of pocket of course, but instead purchase medical insurance, paying monthly premiums as they go along. Therefore medical expenses include health insurance premiums you have paid during the tax year. If your total medical expense exceeds 7.5 percent of your adjusted gross income, the portion exceeding this threshold is tax deductible.
Life Insurance Premiums
The IRS, in its Publication 502 titled "Medical and Dental Expenses," specifically points out that life insurance premiums do not qualify as a medical expense. A review of the rest of the IRS literature reveals that there is no other category of tax-deductible expenses on individual tax returns that allow insurance premiums as deductions. Therefore, life insurance premiums are not tax deductible on your individual tax return.
However, if the premiums of your life insurance policy are paid for by an employer, the payments may be deductible from the corporation's income. If such an insurance policy is provided for you as part of your compensation, it could qualify as a Section 162 Bonus Plan, in which case the firm can deduct such insurance premiums
from its earnings. Notice that even under such conditions, the insurance premiums are not deductible from your personal taxable income on your own tax return. If the premium for the life insurance is shared by you and your employer, only the portion paid by the employer is tax deductible from the corporate taxable income. Your contributions towards such a policy are, again, not tax deductible.
The IRS does not have a favorable view of schemes concocted to circumvent the tax law. Having your sole proprietorship or individually owned company pay your life insurance premiums so as to deduct these expenses from your business' taxable income would be just such an attempt and is therefore not legal. If you are the majority owner of the company and the firm provides life insurance for a group of employees, as opposed to only you the boss, the premiums may be deductible depending on the specifics of the situation; you should consult a tax specialist before making a final determination on how to account for these premiums for tax purposes.
The good news is that just as insurance premiums are not tax deductible for the individual insurance holder, the payouts of life insurance are also, usually, not taxable. The tax law is fair in the sense that it will usually not ask your designated beneficiary to pay taxes on your life insurance payouts when you pass away. There are exceptions and if the estate exceeds a certain limit, the beneficiaries may have to pay certain taxes. Suffice it to say, however, that most individuals receiving payments from a life insurance policy do not pay taxes on the payouts.Source: ehow.com