Final answer:
Policyowner dividends from a life insurance policy are not taxable as they are considered a return of premium. However, interest on accumulations from these dividends is subject to income tax. The correct option is
B.Interest on accumulations is taxed
Step-by-step explanation:
Regarding the treatment of policy owner dividends and income tax, it is generally understood that policy owner dividends from a life insurance policy are not taxable. This is because such dividends are considered a return of premium rather than income. However, it is important to note that if the dividends are left to accumulate interest, the interest portion is subject to income tax and must be reported as taxable income.
If you were to choose from the provided options, the correct answer would be B. Interest on accumulations is taxed. This means while the actual dividends are not considered taxable income, any interest earned from them would be.
As for the other options, they are generally not applicable in this context. Policyowner dividends are not taxed as ordinary income (Option C) nor are they treated as capital gains (Option D) for income tax purposes.
The correct option is
B.Interest on accumulations is taxed