Where to Report Form 1099-LS on Your 1040

Receiving a Form 1099-LS, Reportable Life Insurance Sale, indicates you have sold a life insurance policy to another party. This transaction, often called a viatical settlement, means the buyer has paid you for the ownership rights to your policy. The Internal Revenue Service (IRS) requires the buyer to report this sale, as it can have tax implications for you as the seller.

Understanding Your Form 1099-LS

Form 1099-LS is an informational document sent to you and the IRS by the person who acquired your policy, providing the initial figures for the sale. The primary figure is in Box 1, labeled “Gross Proceeds.” This amount is the total payment you received from the buyer for the life insurance contract and is used to determine if your sale resulted in a taxable gain.

Calculating Your Taxable Gain or Loss

To determine if you have a taxable gain, subtract your investment in the policy, known as your cost basis, from the gross proceeds listed in Box 1 of your Form 1099-LS.

Your basis is the total amount of premiums you have paid into the policy, minus any tax-free amounts you have received. These can include dividends, outstanding loans against the policy at the time of sale, or other non-taxable withdrawals. The insurance company that issued the policy will send you Form 1099-SB, Seller’s Investment in Life Insurance Contract, which reports your cost basis and the policy’s cash surrender value.

Your health status at the time of the sale is an important factor, as special provisions apply if the insured is terminally or chronically ill. If a physician certifies that the insured has an illness expected to result in death within 24 months, the individual is considered terminally ill. In this situation, the proceeds from the sale are generally excludable from income, and no tax is owed.

For individuals certified as chronically ill, the proceeds may also be excluded from income up to certain limits tied to a per diem amount that is indexed for inflation. If the proceeds exceed this allowable amount, the excess may be taxable. Any taxable gain is considered a capital gain, though a portion could be treated as ordinary income if the policy’s cash surrender value exceeds your basis.

Reporting the Sale on Your Tax Return

After calculating your taxable gain, you must report it to the IRS on forms that accompany your Form 1040.

First, complete Form 8949, Sales and Other Dispositions of Capital Assets. On this form, you will report the details of the sale, including a description of the property (the life insurance contract), the acquisition date, and the sale date. The sales price is the “Gross Proceeds” from Box 1 of your Form 1099-LS, and the cost basis is the figure you calculated.

The totals from Form 8949 are then transferred to Schedule D, Capital Gains and Losses. This form categorizes your gain or loss as either short-term or long-term, depending on how long you held the policy.

The net capital gain or loss from Schedule D is carried to your main tax return, Form 1040. This amount is entered on the line for capital gains or losses and included in your total income calculation. Any portion of the gain treated as ordinary income is reported on the “Other Income” line of Schedule 1 of Form 1040.