Do I need to pay for teen second life?

Do I need to pay taxes on a life insurance policy?

• My father recently passed away and we have a small inheritance. There is about 16k from a 401k and 25k from a life insurance policy. What are our obligations as far as paying taxes? ...show more

• Answer:

  Proceeds from a life insurance policy are generally not taxable income. This is explained in IRS Publication 525, available online. Payments to survivors under a deceased's 401k plan are taxable income to the same extent that they would have been taxable income to the deceased -- that generally means that they are taxable income. This is discussed in IRS Publication 575, also available online. If the payments from the 401k are split among the siblings, each one will pay taxes on the amount he or she receives. Life insurance proceeds are included in a deceased's estate for purposes of the federal estate tax, but your description suggests that your father's estate is too small to be subject to the estate tax.