Form 1099-SB - Dec 2019

A complete guide to Form 1099-SB

What is Form 1099-SB?

Form 1099-SB, Seller's Investment in Life Insurance Contract, is an IRS information return filed when a life insurance policy is sold in a reportable policy sale. The form documents the seller's cost basis and the policy's surrender value at the time of the transfer.

The acquirer of the policy is responsible for filing Form 1099-SB with the IRS and providing a copy to the seller. These figures are essential for calculating whether the seller has a taxable gain from the transaction.

Who receives a Form 1099-SB?

If you sold or transferred a life insurance policy and received payment, you should expect a copy of this form. The following types of sellers typically receive one:

• Individuals who sold a life insurance policy through a life settlement, where a third-party buyer purchases the policy for more than its cash surrender value
• Policy owners involved in a viatical settlement that doesn't qualify for the tax-free exclusion under IRC Section 101(g)
• Trustees or estate representatives who sold a policy held in a trust or estate as part of financial planning or liquidity needs

What is the difference between Form 1099-LS and Form 1099-SB?

Both forms were introduced under the Tax Cuts and Jobs Act of 2017 to bring more transparency to life insurance policy sales. They cover different sides of the same transaction.

Form 1099-LS reports the gross amount the buyer paid to acquire the policy. Form 1099-SB reports the seller's investment in the contract and its surrender value. Together, the two forms give the IRS and the seller the figures needed to calculate the taxable gain.

How does Form 1099-SB affect your taxes?

The gain from a life insurance policy sale is generally the difference between what you received (reported on Form 1099-LS) and your investment in the contract (reported on Form 1099-SB). That gain may be split into two categories with different tax rates:

• Ordinary income: The portion of gain between your cost basis and the policy's surrender value is typically taxed as ordinary income
• Capital gain: Any amount received above the surrender value is generally treated as long-term capital gain, which may qualify for a lower tax rate

The IRS requires you to report this income even if the gain is small, since both the acquirer and the insurance company file information returns on the transaction.

What to review before filing with Form 1099-SB

Before you use Form 1099-SB to prepare your tax return, take a few minutes to verify the details. Errors on information returns can lead to mismatched records with the IRS and potential follow-up notices.

Check the following items against your own records:

• Correct spelling of names on the form, including the policy owner and any listed beneficiaries
• Accurate policy numbers that match the original life insurance contract documentation
• Matching transfer details, including the date of the reportable policy sale and the identity of the acquirer
• Complete investment records showing premiums paid, cost of insurance charges and any other amounts that factor into your basis
• Consistency with Form 1099-LS, confirming the sale amount and parties align across both forms

If anything looks wrong, contact the issuer of the form to request a corrected version before filing your return. Filing with incorrect information can trigger an IRS notice or delay your refund. It's easier to resolve discrepancies upfront than to amend a return after the fact.

How to report a life insurance policy sale on your tax return

Reporting income from a policy sale requires information from both Form 1099-LS and Form 1099-SB. Without both forms, you won't have the full picture of your cost basis and sale proceeds. Follow these steps to report it correctly:

• Gather your forms. Collect your Form 1099-LS (showing the sale amount) and Form 1099-SB (showing your cost basis and surrender value).
• Calculate your gain. Subtract the investment in the contract (Box 1 of Form 1099-SB) from the total amount received (reported on Form 1099-LS).
• Split the gain by tax treatment. Determine how much falls under ordinary income and how much qualifies as long-term capital gain.
• Report on your return. The ordinary income portion goes on your return as other income. The capital gain portion is reported on Schedule D and Form 8949.

Consider consulting a tax professional if the transaction involves a high-value policy or complex settlement arrangement. Life insurance policy sales can have layered tax implications that depend on the type of settlement and how long you held the policy. A professional can help ensure you're reporting each portion of the gain correctly.

Need to file Form 1099-SB? Our free Form 1099-SB template makes it easy to complete and organize your tax documents. The template is ready to fill out with your policy sale details, so you can get your filing done quickly and accurately.