How to Report Life Insurance Dividend Excess on Your 2018 Taxes

Why Excess Dividends Matter for 2018 Tax Filers

When a life insurance policy pays dividends that exceed the amount you actually received, those excess amounts are considered taxable income. The IRS treats them as "dividend income" from a policy, so they must be reported on your 2018 tax return. Failing to report can result in penalties and interest.

Step 1: Gather Your Policy Statements

Locate Your Form 1099‑D or 1099‑R

Most insurers will issue a Form 1099‑D or Form 1099‑R if the policy paid dividends that are taxable. If you don't receive a form, you must calculate the excess yourself using the insurer's statement.

Identify the Excess Amount

On the statement, find the section labeled "Taxable Dividends" or "Excess Dividends." This figure is the amount you need to report.

Step 2: Determine the Correct Tax Form

Use Schedule K-1 (Form 1040)

If you are a policyholder who received dividends, you'll report the income on Schedule 1 (Form 1040), Line 8 (Other income). The amount goes directly onto the line, and you attach a statement if requested.

Form 1040, Line 8

Enter the taxable dividend amount from your statement or the 1099 form. The IRS treats it as ordinary income, taxed at your marginal rate.

Step 3: Calculate the Taxable Portion

Sometimes the dividends are split into a "paid" portion and an "excess" portion. Only the excess is taxable. If you received dividends in cash or as additional policy cash value, the excess is the difference between the total dividends paid and the amount you actually received.

Step 4: Report on Your Tax Return

Form 1040 Instructions

1. On Form 1040, Schedule 1, line 8, enter the taxable dividend amount.2. If you used a 1099‑D, attach it to your return.3. If you used a 1099‑R, follow the instructions on the form for reporting taxable distributions.

Example

Policy pays $5,000 in dividends. You receive $3,500 in cash. The excess $1,500 is taxable. Enter $1,500 on Schedule 1, Line 8.

Common Pitfalls to Avoid

• Assuming all dividends are non‑taxable – only the excess is taxable.
• Not attaching the 1099 form – the IRS cross‑checks your return.
• Misreporting the amount on the wrong line – use Schedule 1, Line 8.

What If You Didn't Receive a 1099?

If your insurer didn't issue a 1099, you must calculate the excess based on the policy statement. Keep a copy of the statement and the calculation for your records. The IRS may request documentation if there's a discrepancy.

When to Seek Professional Help

Complex policies, such as those with multiple riders or varying dividend rates, may require a tax professional's expertise. A CPA familiar with life insurance taxation can ensure accurate reporting and help avoid penalties.

Key Takeaway

For 2018, any life insurance dividend that exceeds the amount you actually received is taxable income. Report it on Schedule 1, Line 8 of Form 1040, and attach the relevant 1099 form or a detailed statement if no form was issued.