Life Insurance: How to Report and Optimize Taxes on Your Policy Surrenders in 2023?
Only a surrender in 2023 results in the taxation of proceeds from a life insurance policy. The tax treatment varies depending on when the premiums were paid.
For premiums paid through September 26, 2017, the proceeds are subject to the progressive income tax scale, unless you opted for the flat-rate withholding tax at the time of redemption. However, if you failed to do so, your investment returns will automatically be subject to the progressive tax scale. Even if you opted for the flat-rate withholding tax, your gains must be reported on your tax return: line 2CH if taxed under the progressive scale, line 2DH if you opted for the flat-rate withholding tax.
If you opted for the flat-rate withholding, the annual deduction of 4,600 euros (single) or 9,200 euros (married or in a civil partnership) for contracts lasting more than eight years was not applied to you at the time the withholding was made. This deduction will be granted to you in the form of a tax credit that can be applied against your tax liability. If the credit exceeds your tax liability, the excess will be refunded to you.
For premiums paid on or after September 27, 2017, a non-final advance payment was systematically withheld at the time of surrender at a rate of 12.8% or 7.5%, depending on whether the contract’s term was less than or greater than eight years. However, you have the option to choose the progressive income tax scale. If you do not opt for the progressive scale, the proceeds are subject to the single flat-rate withholding tax (PFU) at a rate of 12.8% if the policy was less than eight years old. If it was more than eight years old, the rate is 7.5% on the first 150,000 euros of outstanding balance (across all policies). When the outstanding balance exceeds 150,000 euros, the 7.5% rate applies to the portion of the balance not exceeding 150,000 euros, with the excess amount subject to the 12.8% rate.
In certain situations, you may be exempt from taxes and social security contributions when you make a withdrawal or close your life insurance policy, particularly in the event of termination of employment, cessation of self-employment following a court order for judicial liquidation, early retirement, or a Social Security disability classification of Category 2 or 3.
The option to use the progressive tax scale is exercised when filing the tax return by checking box 2OP. This option applies across the board and covers not only the capital gain realized upon the sale of ownership interests by the executive, but also all income and capital gains that fall within the scope of the PFU.
The flat tax rate (PFU) is generally more favorable than the income tax schedule once you reach the 30% marginal tax bracket. However, you should consider opting for the income tax schedule if you have significant tax deductions that you risk “losing” if you remain on the flat tax rate. It is therefore recommended that you run some simulations to choose the most advantageous option.
In summary, to report and optimize the taxation of your life insurance policy redemptions in 2023, take into account the date the premiums were paid, the choice between the progressive tax scale and the flat tax rate, as well as any tax exemptions and deductions. Feel free to consult an expert to assist you with these procedures.
