Tax TreatmentQuestion 223 of 315
How is a partial withdrawal from a non-MEC permanent life insurance policy taxed?
a.Gain comes out first as ordinary income (LIFO)
b.Basis comes out first tax-free (FIFO), then gain as ordinary income
c.The entire withdrawal is income-tax-free up to the cash value
d.The withdrawal is treated as long-term capital gain
Explanation
IRC §72(e)(5) gives non-MEC life insurance FIFO ordering: the owner first recovers premiums paid (basis) tax-free, and only amounts above basis are taxed as ordinary income. MEC contracts use the opposite LIFO ordering.
Law Reference: IRC §72(e)(5)Practice all 315 questions free — no signup required.
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