Income Averaging

What Does Income Averaging Mean?

Income averaging is a method of calculating a person’s income by spreading their earnings over a multiple-year period.

Earnings from insurance policies, such as life insurance, could be included as part of a person’s income. These earnings would be added to the individual’s yearly total and factored into the income averaging calculation. In most cases, life insurance proceeds aren’t taxable as income for the beneficiary, though interest earned on the death benefit is.

Insuranceopedia Explains Income Averaging

Government regulation from 1986 eliminated the practice of income averaging for tax purposes. As a result, Americans must now calculate their income each year and use that figure when filing taxes.

Earnings from life insurance and other insurance benefits can still be factored into tax calculations, but only those acquired during the given tax year. How much actually gets reported also depends on the payout method; the process of collecting a life insurance policy typically involves a choice between a lump sum and installment payments, and that choice affects which portions count as interest income. Many taxpayers choose to hire an accountant to help calculate their taxable income.