What Your Tax Preparer Needs After a Sale

Call One: The Closing Coordinator at the Provider or Broker

Start here because this party controls the two documents that anchor everything else. Ask for a copy of the final closing statement or settlement statement, showing the gross purchase price, every commission and fee deducted, and the net amount actually wired to you. Then ask, in these words: who is filing the Form 1099-LS for this transaction, what address will it be mailed to, and can you confirm the taxpayer identification number you have on file for me.

Form 1099-LS, Reportable Life Insurance Sale, exists because of the reporting rules in Internal Revenue Code section 6050Y, added by the Tax Cuts and Jobs Act of 2017 for reportable policy sales occurring after 2017. The buyer files it and furnishes a copy to the seller and a notice to the issuing insurance company. Under the section 6050Y regulations the statement to the seller is generally due by February 15 of the year following the sale; confirm the current-year deadline with your preparer or the IRS instructions for the form.

Also confirm the exact date of the sale and the date you received the funds, because a transaction that closed in late December and funded in early January raises a timing question your preparer needs to resolve deliberately rather than by guessing. While you have them on the line, confirm the premium arrangement from the closing date forward, which our page on who pays premiums after a sale covers.

Call Two: The Insurance Carrier’s Policyholder Service Line

Two documents live here and both matter. Ask for Form 1099-SB, Seller’s Investment in Life Insurance Contract, which the issuing company furnishes to a seller after it receives notice of a reportable policy sale. It reports the seller’s investment in the contract and the amount that would have been received on surrender, which are the two figures the tax calculation turns on.

Then ask separately for the complete premium payment history for the life of the policy, in writing. Do not skip this. Form 1099-SB gives the carrier’s figure; the payment history is what lets your preparer check it and reconstruct basis if the policy changed hands, if premiums were paid from more than one account, or if there were policy loans or partial withdrawals along the way. Carriers commonly take several weeks to produce a full history, and once ownership has transferred they are slower about it, so call in January rather than in March.

Ask one more question: were there any outstanding policy loans at closing, and how were they settled. A loan repaid out of the sale proceeds changes the arithmetic and is a frequent source of surprise. Our overview of what happens to the policy after a sale explains why the carrier’s records are the authority on this.

Call Three: Your CPA or Enrolled Agent, Before Year End Ideally

Bring the closing statement, both 1099s once they exist, the premium history and the policy’s most recent statement. The question to ask is not what do I owe; it is how does this transaction split across the layers, and what do I need to send you.

In general terms, and this is a matter for your preparer rather than for a website, the taxation of a life settlement is usually described in three layers. Amounts up to the seller’s basis, which after the Tax Cuts and Jobs Act is generally total premiums paid without the reduction for cost of insurance charges that earlier IRS guidance had required, are typically treated as a recovery of capital. Amounts above basis up to the policy’s cash surrender value are generally treated as ordinary income, because that is the portion that would have been taxable on a surrender. Amounts above cash surrender value are generally treated as capital gain, long term if the policy was held more than a year.

Ask your preparer where each layer is reported on your return, since capital gain and ordinary income land in different places, and ask whether an estimated tax payment is needed. The underpayment safe harbours are the ordinary ones: paying in at least 90 percent of the current year’s tax, or 100 percent of the prior year’s tax, rising to 110 percent when prior-year adjusted gross income exceeded $150,000. Those thresholds are stated as of 2026; confirm the current figures in the IRS instructions.

Order	Who to Call	Exact Question	Document You Want
1	Provider or broker closing coordinator	Who is filing the 1099-LS and to what address?	Closing statement and Form 1099-LS
2	Insurance carrier policyholder service	Can you send Form 1099-SB and the full premium payment history?	Form 1099-SB and premium history
3	Your CPA or enrolled agent	How does this split across basis, ordinary income and capital gain?	A written plan and any estimated payment schedule
4	Physician and the provider’s compliance desk	Is there a certification, and were you licensed in my state?	Certification copy and licence confirmation
5	Social Security Administration	What year sets my Medicare premium, and what are the brackets?	Written confirmation; Form SSA-44 only if an event applies
6	State revenue department and benefit agency	Is this taxed here, and what is my reporting deadline?	State guidance and a dated report of the change

Call Four, Only If Illness Is Involved: The Physician and the Provider’s Compliance Desk

If the insured was terminally or chronically ill at the time of the sale, the analysis can change completely, and the documentation has to exist before the return is filed rather than after an inquiry.

Internal Revenue Code section 101(g) treats amounts received on the sale or assignment of a policy to a viatical settlement provider, for an insured who is terminally ill or chronically ill, as amounts paid by reason of the insured’s death, which are generally excluded from income subject to the statute’s conditions. Terminal illness has a defined meaning built on a physician’s certification that death is reasonably expected within a stated period. The chronically ill route carries additional conditions, including limits tied to qualified long-term care services. Whether either applies is a question of documentation and of whether the buyer met the statutory definition of a viatical settlement provider in the seller’s state.

So ask two things. Ask the treating physician’s office for a copy of any certification that was provided during the transaction, and ask the provider’s compliance or legal desk to confirm in writing that it held the applicable state licence at the time of purchase. Give both to your preparer. Our page on how the viatical exclusion works lays out the shape of the rule, and your CPA applies it.

Call Five: Social Security, About the Medicare Premium Two Years Out

This is the call almost nobody makes and the one that generates the most unpleasant surprise. Medicare Part B and Part D premiums carry an income-related monthly adjustment amount for higher-income beneficiaries, and the Social Security Administration determines it using modified adjusted gross income from the tax return two years earlier. A large one-time gain in 2026 can therefore raise Medicare premiums in 2028, long after the money is gone.

Ask Social Security two questions. What year’s return will be used to set my premium for the coming year, and what are the current income brackets. Then ask the harder one: the agency uses Form SSA-44 to reconsider the adjustment after a life-changing event, and the events it recognises are a specific list including marriage, divorce or annulment, death of a spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income and an employer settlement payment. A one-time policy sale is not on that list. Understanding that in advance is worth more than appealing it afterwards.

The practical response is planning rather than protest: your preparer may be able to discuss timing across tax years, and knowing the increase is coming lets a household budget for it. Confirm current brackets and rules with Social Security, or with a free State Health Insurance Assistance Program counselor, who will not sell you anything.

Call Six: Your State Revenue Department and Any Benefit Agency

Two separate calls, both short. First, the state. States differ on how they treat this income and a few impose no personal income tax at all; ask the state department of revenue whether the ordinary income and capital gain layers are taxed and whether estimated payments are due. Ask your preparer about withholding, since proceeds are generally paid without any withheld, which is precisely why an estimated payment may be needed.

Second, and more urgently for many households, any means-tested benefit. A lump sum is generally treated as income in the month it is received and as a countable resource in the months afterwards, which can suspend Medicaid, Supplemental Security Income or a home and community-based waiver. Report it to the agency within the reporting deadline stated in your notice, which is often ten days from the end of the month in which the change occurred, and confirm the exact deadline with the agency rather than assuming.

This is not a place to improvise. Talk to an elder law attorney and to the state agency, and do it before the money is spent, because the sequence of spending is what determines the outcome. Nothing on this site is Medicaid-eligibility advice. If a family member was paid as a caregiver out of the proceeds, that creates its own reporting questions, covered in the tax questions caregivers run into.

If a Form Never Arrives, and What to Keep

Forms go missing, especially after an address change. If February passes without the 1099-LS or the 1099-SB, call the party responsible and request a duplicate in writing. If that fails, your preparer can check what was actually filed under your taxpayer identification number by pulling an IRS wage and income transcript, which is available free through the IRS online account or by request. A missing form does not remove the obligation to report the transaction correctly.

Keep the file permanently. The closing statement, both 1099s, the premium payment history, the carrier’s confirmation of the ownership change, any physician certification, and the licence confirmation from the provider. This is the package that answers a question three years from now, and reconstructing a premium history for a policy you no longer own is close to impossible once the carrier has archived the record.

If you are reading this before a sale rather than after one, the single most useful thing you can do is request the premium payment history and a current in-force illustration from the carrier now, while you are still the owner and the carrier still has to answer you. Our list of documents a provider needs overlaps almost entirely with what your preparer will want later, so gather them once. And if you are still deciding, a free review costs nothing: send the policy cover page or call (732) 978-9575. Pine Lake Legacy does not purchase policies and does not give tax or legal advice.

---

Frequently Asked Questions

What is Form 1099-LS and who sends it?

Form 1099-LS, Reportable Life Insurance Sale, is filed by the buyer under the reporting rules in Internal Revenue Code section 6050Y, which took effect for sales after 2017. A copy goes to the seller and a notice goes to the issuing insurance company. Under the regulations it is generally furnished by February 15 of the following year; confirm the current deadline.

What is Form 1099-SB for?

The insurance company furnishes Form 1099-SB, Seller’s Investment in Life Insurance Contract, after it receives notice of a reportable policy sale. It reports your investment in the contract and the amount that would have been received on surrender. Those two figures drive the calculation, which is why your preparer also wants the underlying premium payment history.

How is a life settlement generally taxed?

It is usually described in three layers: recovery of basis, then ordinary income up to the policy’s cash surrender value, then capital gain above that. Since the Tax Cuts and Jobs Act, basis is generally total premiums paid without a reduction for cost of insurance charges. Your CPA applies this to your facts; do not self-file this one.

Is the money tax-free if the insured was terminally ill?

It can be. Internal Revenue Code section 101(g) treats amounts received on a sale to a viatical settlement provider for a terminally or chronically ill insured as paid by reason of death, generally excluded from income subject to the statute’s conditions. Gather the physician certification and written proof the buyer was licensed, and give both to your preparer.

Will a policy sale raise my Medicare premiums?

It can, two years later. Part B and Part D carry an income-related monthly adjustment based on modified adjusted gross income from the return filed two years earlier. Form SSA-44 allows reconsideration only for a specific list of life-changing events, and a one-time policy sale is not among them. Confirm current brackets with Social Security.

Do I need to make an estimated tax payment?

Possibly, because settlement proceeds are generally paid without withholding. The usual underpayment safe harbours are paying in at least 90 percent of the current year’s tax or 100 percent of the prior year’s, rising to 110 percent when prior-year adjusted gross income exceeded $150,000. Those figures are as of 2026; confirm with your preparer.

The 1099 never came. What do I do?

Request a duplicate in writing from the party responsible, and if that fails have your preparer pull an IRS wage and income transcript to see what was actually filed under your taxpayer identification number. A missing form does not remove the obligation to report the transaction, and the closing statement plus the premium history usually reconstruct it.

Related Reading

• Viatical Tax Exclusion Rules
• Who Pays Premiums After Sale
• What Happens To My Policy After I Sell It
• Caregiver Tax Questions
• What Documents A Provider Needs
• What Is A Viatical Settlement
• What Is A Life Settlement
• What Is Estate Tax Portability

---

Pine Lake Legacy does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.