As you near retirement, you want to ensure you’ll have enough funds to cover your lifestyle. While your income and Social Security benefits may play a role, you may also want to consider your available tax deductions as a potential way to save money.
A tax deduction is an amount you subtract from your reported income, reducing how much of your income is subject to tax. For instance, your contributions to individual retirement and health savings accounts are deductible even if you don’t itemize.
But you may be wondering about another expense: is life insurance tax deductible? Here’s what to know.
When Life Insurance Isn’t Tax Deductible
The premiums you pay for a life insurance policy that covers your own life aren’t usually tax deductible. The IRS considers life insurance a personal expense, so policies you own aren’t eligible for tax deductions.
When Life Insurance May Be Tax Deductible
In some cases, you may be able to deduct the cost of a life insurance policy from your taxable income.
As a Business Expense
Life insurance may be deductible under the IRS’s tax rules for small business owners. If you’re the sole proprietor of a business that provides life insurance as an employee benefit, you can generally deduct the policy premiums you pay.
However, you can’t deduct life insurance as a business expense if you’re a direct or indirect beneficiary under the policy contract. You’re a direct beneficiary if the policy names you as the designated recipient of the policy’s death benefit. You’re an indirect beneficiary if the policy owner is obligated to repay a loan from you using the policy’s proceeds.
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As a Charitable Donation
Another possible way to make life insurance tax deductible is to gift the policy to a charitable organization. For example, if you own a permanent life insurance policy with cash value, you could transfer policy ownership to a charity while continuing to pay the premiums. The charity would then control the insurance contract and could either tap the policy’s cash value immediately or let the account continue to grow.
Donating an insurance policy to a charity isn’t the same as naming a charity as the beneficiary of a policy. In that case, you still control the contract, so the IRS doesn’t allow you to deduct those premiums.
If You Pay Alimony
If you completed a divorce or separation agreement before 2019 that requires you to pay alimony, you can deduct those payments from your taxable income. Since alimony includes life insurance premiums you must pay under your agreement, those premiums may be tax deductible. You can only deduct them if your former spouse is the policy owner, not the beneficiary.
A recent tax law change doesn’t allow you to deduct alimony payments after 2019.
Understanding Your Eligibility
Tax deductions can help you save money by lowering your tax bill. But complex and frequently changing tax laws and regulations can make it hard to figure out if a deduction is allowed in your case. So, consult with a tax professional to help determine whether you can deduct life insurance payments on your tax return.
Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.
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