Final answer:
Policy owner's dividends on life insurance policies have different tax treatment based on various factors such as how the policy was paid for and how the dividends are used.
Step-by-step explanation:
Policy owner's dividends refer to the dividends paid on life insurance or annuity policies. These dividends are treated differently for income tax purposes, depending on how the policy was paid for and how the dividends are used.
If the policy owner paid premiums on the policy using after-tax dollars, the dividends are considered a return of premium and are not subject to income tax. However, if the policy owner paid premiums using pre-tax dollars, such as through an employer-sponsored plan, the dividends are taxable as regular income.
Additionally, if the policy owner chooses to leave the dividends with the insurance company to accumulate interest or to purchase additional insurance coverage, the dividends are not taxed until they are withdrawn or used to pay premiums. On the other hand, if the dividends are taken as cash or used to offset premiums, they are taxable in the year they are received.