Life insurance: what to declare for taxes?

Life insurance: what to declare for taxes?

Life insurance: operation and redemption

Whether you’re 30 or 50, you’re thinking about taking out life insurance. This insurance allows the beneficiaries to live despite your absence, and to be able to finance your funeral in the event of death before the end of the contract. If you do not make any surrenders during the term of your life insurance contract, your earnings are income tax exempt.

But when you make a partial withdrawal or redemption of your life insurance or in the event of termination of the contract, when you ask to recover all of your savings in the form of capital, your earnings become taxable. Redemption is the operation that allows the subscriber to obtain, before the end of the contract, the total or partial payment of his savings. This savings was built up by the subscriber and results from the payments made. Indeed, you can subscribe to two types of redemption:

  • total surrender terminates the contract;
  • the partial surrender does not in any way modify the effects of the contract or its anteriority. The sums which remain invested in it continue to produce interest and to be transferable outside the estate in the event of the death of the insured.

The redemption request must be made in writing. To do this, you have a form made available to the insurer. Otherwise, you can express your wish by registered letter addressed to the insurer. The redemption of life insurance can be made at any time, but for this, it is necessary that the contract is redeemable or that the beneficiary of the contract has not accepted the benefit of the contract. The withdrawal, redemption, of your insurance, whether partial or total, is then subject to taxation.

Allowance: life insurance and capitalization contracts

Income from life insurance contracts received in 2020, for your 2021 tax, is subject to the progressive income tax scale. They are subject to this scale after application of an annual reduction of:

  • €4,600 (single, widowed or divorced);
  • or €9,200 ( married or PACS couples subject to joint taxation) for contracts lasting more than 8 years.

However, you can opt for a flat-rate discharge (PFL), instead of choosing a progressive scale income tax, the rate of which depends on the duration of the contract. However, the PLF option applies to tax households earning less than €2,000 annually in interest.

A reduction of €4,600 or €9,200

Income recognized or acquired as of January 1, 1998, on life insurance contracts and capitalization bonds from French or European sources with a duration of at least 8 years (6 years for those taken out before January 1, 1990 ) are subject to income tax. This income tax does not apply for the subscription of an annual allowance of €4,600 (single, widowed, or divorced) or €9,200 (married or PACS couples subject to joint taxation). As an option, these products may be subject to a withholding tax of 7.5%.

Exempt products

The following are exempt:

  • warrants or contracts with a duration of at least 8 years (or 6 years) taken out before September 26, 1997, with an insurance company established in France
  • income acquired or recorded from January 1, 1998, and attached to the following payments:
    • payments made before September 26, 1997
    • payments made before September 26, 1997, on contracts with periodic premiums when they correspond to the premiums initially provided for in the contract
  • Products attached to unit-linked contracts mainly invested in shares with a duration of at least 8 years, known as DSK or NSK contracts

The annual allowance of €4,600 (for single people) or €9,200 (for married or PACS couples) is automatically applied to all taxable income from life insurance contracts and capitalization bonds. a period of at least 8 years (or 6 years if applicable).

Declare in practice

Earnings from your life insurance are to be entered on your main tax return(form no. 2042):

♦ Online 2DH: you will need to indicate the amount of income from life insurance policies and capitalization bonds from French or European sources for which you have opted for the 7.5% withholding tax. This will allow you to obtain the allowance of €4,600 (or €9,200). The amount indicated on this line will be retained in the determination of a reference tax income.

♦ Online 2CH: if your contract was settled in 2017 and if you have not opted for the 7.5% final withholding tax, indicate on this line the amount of income acquired or recognized as of January 1, 1998, (on premiums paid from September 26, 1997). Several cases then apply:

  • When the amount of income declared online 2CH is less than the allowance of €4,600 or €9,200, or when no income is declared online 2CH, the remainder of the allowance or all of the unused allowance may be charged to income declared online 2DH. This imputation is carried out automatically during the calculation of the tax.
  • The allocation of the abatement remaining available allows you to benefit from a tax credit for income declared online 2DH which has been the subject of the withholding tax of 7.5% on the date of the payments.
  • This credit is equal to 7.5% of the remaining allowance, possibly limited to the amount of income declared online 2DH.

Income not eligible for a tax deduction

Some income does not qualify for a tax deduction. These include in particular:

  • income from life insurance contracts with a duration of fewer than 8 years
  • interest and other fixed-income investment products
  • equity loan interest
  • interest and other fixed-income investment income not exceeding €2,000 taxable on option at 24%

You will need to complete the rest of the 2042 K declaration as appropriate.

Income from life insurance contracts with a duration of fewer than 8 years and distributions (line 2TS)

The products concerned by this line are in particular:

  • products from capitalization bonds and contracts and investments of the same type of life insurance) with a duration of fewer than 8 years for which you have not opted for the flat-rate withholding tax
  • insurance products of more than 8 years from a foreign source outside Member States of the European Union or member of the European Economic Area (EEA) having concluded with France an administrative assistance agreement to combat fraud and tax evasion.
  • attendance fees received by members of the board of directors or the supervisory board of companies
  • advances, loans, and installments received by the partners of capital companies
  • income from stocks and shares in companies not eligible for the 40% tax deduction

Interest and other fixed-income investment products (line 2TR)

These include the following products in particular:

  • interest on taxed bank books;
  • income from deposit accounts and term accounts;
  • receivables products, sureties, partners’ current accounts;
  • government bond proceeds;
  • Treasury bond products on formulas and similar, namely PTT (Post, Telegraph, and Telephone) or La Poste savings bonds, Caisse Nationale de l’Energie bond products, bonds issued by regional groupings of savings and pension plans, 5-year bonds from Crédit foncier de France;
  • proceeds from cash certificates issued by credit institutions;
  • proceeds from cash certificates issued by companies;
  • debt securities negotiable on a regulated market (commercial paper, etc.);
  • products of mutual funds (FCC) less than 5 years old and liquidation certificate of these funds;
  • interest on loans granted between individuals;
  • interest accrued in 2015 on housing savings plans (PEL) over 12 years old or matured for plans opened before April 1, 1992. The savings premium is exempt from income tax in full.
By Master James

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