[kanba]

Under a $150000 insurance policy on her deceased father’s life, May Green is to receive $12000 per year for 15 years. Of the 12000 received in the current year, the amount subject to income tax is : $2000. The explaination showed that Amount received in current yr (12000)less return of principal(10000+150000/15yrs) eaquals the taxable interest (2000).

I have no idea with this explanation. I think the $150000 is the total life insurance proceed, so for current yr, nothing should be included in return even though we received 12000 this year. I think life insurance proceed is nontaxable. Can anyone help me to explan it?

[hopefulcpa28]

Life Insurance proceeds aren't taxable, and thus not included in the gross income.

However, interest on life insurance proceeds are taxable.

For this question: This is the way I look at it and it helps me

Policy was for $150,000 so you are supposed to get that and that portion won't be taxable.

If you are getting $12,000 for 15 years: 12,000 X 15 = $180,000. So at the end of 15 years, you'll have total of $180,000

But wait, the policy was only for $150,000…so extra $30,000 is interest. They can't tax you on it in one year since you are getting it throughout the 15 years.

SO 30000/15 = $2000 is interest per year. So they'll tax you on $2000 every year until year 16.

For year 1: $10,000 won't be taxable, but $2000 will be taxable.

Hope that helps!

[Author]

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