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Will I be taxed on my mom's life insurance policy?

December 4, 2012: 6:32 AM ET

My mom just passed away, and I'm the beneficiary of her $25,000 life insurance policy. Am I taxed on this? I plan to disperse the money to others in my family. Can I pay tax on it off the top so others don't have to pay tax on the money? –Jerry

In general, the face value of a life insurance policy is not subject to federal income tax, says Susan Growney, vice president of financial services firm Shaw & Associates in Yuba City, Calif. That said, you may owe state estate or inheritance taxes on the life insurance proceeds, depending on where you live and the size of your mother's estate. (Connecticut's Office of Legislative Research offers a handy state-by-state list of estate and inheritance taxes.)

Regardless of where you live, any interest that the policy value may have earned between the time of your mother's death and when the death benefit is paid out to you would be taxable — although, given the value of the policy, that tax bill is unlikely to amount to much.

The good news is that any tax owed on the insurance money is only taxable to you as the beneficiary, and not to anyone you choose to pass it along to. Just be aware that in 2012 you can gift up to a maximum of $13,000 per individual per year before you have to file a federal gift tax return (but even if you do have to file, you likely won't actually owe any gift tax).

— Marc Mewshaw

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