Q: In California, is a life insurance payout considered gross income, and is it taxable (federally too)?

A: Under California law, life insurance payouts are generally not considered taxable income for state tax purposes. However, life insurance payouts may be subject to federal income tax, depending on the circumstances.

If the policy was taken out by the deceased person and the payout goes to their estate, the life insurance payout is generally not taxable for federal income tax purposes. However, if the policy was taken out by someone else and the payout goes to a beneficiary, the amount of the payout that exceeds the policy premiums paid may be subject to federal income tax.

The IRS has specific rules about how life insurance payouts are taxed, depending on factors such as the type of policy and the amount of the payout. In general, if the payout is a lump sum, the amount that exceeds the policy premiums paid is taxable income. However, if the payout is in installments, only the interest portion of each payment is taxable.

It's important to note that life insurance payouts do not increase your tax bracket directly. However, the amount of the payout may increase your taxable income for the year, which could push you into a higher tax bracket.

If you have received a life insurance payout and are unsure about the tax implications, it's a good idea to consult with a tax professional or accountant who can advise you on your specific situation.

A: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.