Life Insurance Sale form 1099-LS and 1099-SB

[adifusco]

Client was terminally ill in 2021 so she sold her life insurance.  She received a 1099-LS and 1099-SB.  There is an amount in Box 1 for both forms.  How do I account for this on form 1040?  A tax attorney told her the sale of the life insurance policy was not taxable due the terminal illness.  In 2022 she is still battling cancer.

[Terry53029]

Her Attorney is correct See (https://www.irs.gov/pub/irs-drop/n-18-41.pdf). I use ProSeries, so not sure how to handle in Lacerte. I would report as other income, and then back it out with reference to Notice 2018-41

[BobKamman · Accepted solution]

If it is not income, it doesn't belong on a tax return, and playing the game of "try to trick the IRS computer" is more likely to lead to an audit.  There is no indication that IRS is matching these forms to 1040's. The purpose of reporting is to track the profits of those who buy and sell contracts.  If it's a viatical settlement, it's excluded from income just as life insurance proceeds paid to a beneficiary of a decedent are excluded.  We don't add those in and back them out. 

If anything, attach a statement to the return noting the amount received and citing authority for its exclusion.   

[adifusco]

Thank you for helping me