Page 47 - Virtual Currencies

8:29 - 7-Feb-2023
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Fileid: … tions/p525/2022/a/xml/cycle08/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Endowment proceeds that you choose to re- Recoveries Mortgage interest refund. If you received a
ceive in installments instead of a lump sum pay- refund or credit in 2022 of mortgage interest
ment at the maturity of the policy are taxed as A recovery is a return of an amount you deduc- paid in an earlier year, the amount should be
an annuity. This is explained in Pub. 575. For ted or took a credit for in an earlier year. The shown in box 4 of your Form 1098. Don’t sub-
this treatment to apply, you must choose to re- most common recoveries are refunds, reim- tract the refund amount from the interest you
ceive the proceeds in installments before re- bursements, and rebates of itemized deduc- paid in 2022. You may have to include it in your
ceiving any part of the lump sum. This election tions. You may also have recoveries of noni- income under the rules explained in the follow-
must be made within 60 days after the temized deductions (such as payments on ing discussions.
lump-sum payment first becomes payable to previously deducted bad debts) and recoveries
you. of items for which you previously claimed a tax Interest on recovery. Interest on any of the
credit. amounts you recover must be reported as inter-
Accelerated Death Benefits est income in the year received. For example,
Tax benefit rule. You must include a recovery report any interest you received on state or lo-
Certain amounts paid as accelerated death in your income in the year you receive it up to cal income tax refunds on Form 1040,
benefits under a life insurance contract or viati- the amount by which the deduction or credit you 1040-SR, or 1040-NR, line 2b..
cal settlement before the insured's death are took for the recovered amount reduced your tax
excluded from income if the insured is termi- in the earlier year. For this purpose, any in- Recovery and expense in same year. If the
nally or chronically ill. crease to an amount carried over to the current refund or other recovery and the expense occur
year that resulted from the deduction or credit is in the same year, the recovery reduces the de-
Viatical settlement. This is the sale or assign- considered to have reduced your tax in the ear- duction or credit and isn't reported as income.
ment of any part of the death benefit under a life lier year.
insurance contract to a viatical settlement pro- Recovery for 2 or more years. If you receive
vider. A viatical settlement provider is a person Federal income tax refund. Refunds of fed- a refund or other recovery that is for amounts
who regularly engages in the business of buy- eral income taxes aren't included in your in- you paid in 2 or more separate years, you must
ing or taking assignment of life insurance con- come because they're never allowed as a de- allocate, on a pro rata basis, the recovered
tracts on the lives of insured individuals who are duction from income. amount between the years in which you paid it.
terminally or chronically ill and who meets the This allocation is necessary to determine the
requirements of section 101(g)(2)(B) of the In- State tax refund. If you received a state or lo- amount of recovery from any earlier years and
ternal Revenue Code. cal income tax refund (or credit or offset) in to determine the amount, if any, of your allowa-
2022, you must generally include it in income if ble deduction for this item for the current year.
Exclusion for terminal illness. Accelerated you deducted the tax in an earlier year. The
death benefits are fully excludable if the insured payer should send Form 1099-G to you by Jan- Example 28. You paid 2021 estimated
is a terminally ill individual. This is a person who uary 31, 2023. The IRS will also receive a copy state income tax of $4,000 in four equal pay-
has been certified by a physician as having an of the Form 1099-G. If you file Form 1040 or ments. You made your fourth payment in Janu-
illness or physical condition that can reasonably 1040-SR, use the worksheet in the 2022 In- ary 2022. You had no state income tax withheld
be expected to result in death within 24 months structions for Schedule 1 (Form 1040) to figure during 2021. In 2022, you received a $400 tax
from the date of the certification. the amount (if any) to include in your income. refund based on your 2021 state income tax re-
See Itemized Deduction Recoveries, later, for turn. You claimed itemized deductions each
Exclusion for chronic illness. If the insured when you must use Worksheet 2, later in this year on Schedule A (Form 1040).
is a chronically ill individual who isn't terminally publication. You must allocate the $400 refund between
ill, accelerated death benefits paid on the basis If you could choose to deduct for a tax year 2021 and 2022, the years in which you paid the
of costs incurred for qualified long-term care either: tax on which the refund is based. You paid 75%
services are fully excludable. Accelerated death • State and local income taxes, or ($3,000 ÷ $4,000) of the estimated tax in 2021,
benefits paid on a per diem or other periodic • State and local general sales taxes, then so 75% of the $400 refund, or $300, is for
basis are excludable up to a limit. For 2022, this the maximum refund that you may have to in- amounts you paid in 2021 and is a recovery
limit is $390. It applies to the total of the accel- clude in income is limited to the excess of the item. If all of the $300 is a taxable recovery
erated death benefits and any periodic pay- tax you chose to deduct for that year over the item, you'll include $300 on Schedule 1 (Form
ments received from long-term care insurance tax you didn't choose to deduct for that year. 1040), line 1, for 2022, and attach a copy of
contracts. For information on the limit and the your calculation showing why that amount is
definitions of chronically ill individual, qualified Example 26. For 2021, you can choose a less than the amount shown on the Form
long-term care services, and long-term care in- $10,000 state income tax deduction or a $9,000 1099-G you received from the state.
surance contracts, see Long-Term Care Insur- state general sales tax deduction. You choose The balance ($100) of the $400 refund is for
ance Contracts under Sickness and Injury Ben- to deduct the state income tax. In 2022, you re- your January 2022 estimated tax payment.
efits, earlier. ceive a $2,500 state income tax refund. The When you figure your deduction for state and
maximum refund that you may have to include local income taxes paid during 2022, you'll re-
Exception. The exclusion doesn't apply to any in income is $1,000, because you could have duce the $1,000 paid in January by $100. Your
amount paid to a person (other than the in- deducted $9,000 in state general sales tax. deduction for state and local income taxes paid
sured) who has an insurable interest in the life during 2022 will include the January net amount
of the insured because the insured: Example 27. For 2021, you can choose a of $900 ($1,000 − $100), plus any estimated
• Is a director, officer, or employee of the $9,500 state general sales tax deduction based state income taxes paid in 2022 for 2022, and
person; or on actual expenses or a $9,200 state income any state income tax withheld during 2022.
• Has a financial interest in the person's tax deduction. You choose to deduct the gen-
business. eral sales tax deduction. In 2022, you return an Joint state or local income tax return. If you
item you had purchased and receive a $500 filed a joint state or local income tax return in an
Form 8853. To claim an exclusion for acceler- sales tax refund. In 2022, you also receive a earlier year and you aren't filing a joint Form
ated death benefits made on a per diem or $1,500 state income tax refund. The maximum 1040 or 1040-SR with the same person for
other periodic basis, you must file Form 8853 refund that you may have to include in income 2022, any refund of a deduction claimed on that
with your return. You don't have to file Form is $500, because it's less than the excess of the state or local income tax return must be alloca-
8853 to exclude accelerated death benefits tax deducted ($9,500) over the tax you didn't ted to the person that paid the expense. If both
paid on the basis of actual expenses incurred. choose to deduct ($9,200 − $1,500 = $7,700). persons paid a portion of the expense, allocate
Because you didn't choose to deduct the state the refund based on your individual portion. For
income tax, you don't include the state income example, if you paid 25% of the expense, then
tax refund in income. you would use 25% of the refund to figure if you

Page 24 Publication 525 (2022)