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Gross Income Tax - Viatical Settlements

A viatical settlement is the sale of a life insurance policy by the policy owner before the policy matures. Generally, viatical settlements involve insured individuals with a shorter life span. Proceeds received from viatical settlements should not be taken into account to determine eligibility for Property Tax Reimbursement purposes and these amounts are excluded from federal income taxation if certain requirements are met.

For New Jersey gross income tax purposes, N.J.S.A. 54A:6-4 states that proceeds of life insurance contracts payable by reason of death are excluded from New Jersey gross income taxation. If the person is still alive, amounts received would be taxable and included in the net gains or income from the disposition of property category of income since they are not specifically excluded under the Act in accordance with N.J.S.A. 54A:5-1(c). However, N.J.S.A. 54A:5-1(c) provides that net gains or net income does not include transactions to the extent to which nonrecognition is allowed for federal income tax purposes.

Thus, for New Jersey purposes, any amount from a viatical settlement deemed as compensation paid on a 1099-LTC that is taxable for Federal income tax purposes should be included in taxpayer’s New Jersey gross income in the same way as for federal income tax purposes and any amount excluded for Federal income tax is excluded in the same way for New Jersey gross income tax purposes.

Last Updated: Wednesday, 08/20/14

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