QUOTE=TaxGuru;2605]Sorry to hear about the passing of your Wife! (Thank you.)
Generally speaking according to the IRS tax code, "Life Insurance proceeds are exempt from Income Taxation!" So, your daughter will not have to claim this money as income on her tax return. Also, you may be able to claim your daughter as a dependent on your tax return assuming you satisfy the criteria required to claim a dependent.
Please refer to the following link to see if you satisfy the conditions to claim your child as a dependent. What conditions have to be met in order claim a qualifying child as a dependent?
If you qualify to claim your daughter as a dependent, "it is generally better to have your daughter file as being a dependent of her parent". This is because her tax rate is lower than yours. In other words, since your tax rate is higher it better that you claim her as a dependent, thus there is more of a tax savings. (My daughter uses her income to apply for grants and other financing for each of her years / semesters. If I claim her, I'm afraid that they'll also want to use my income; hense, her receiving less aid money. I understand that this may be a personal call on my part but I would like to hear your oppinion.)
I would recommend that you claim your daughter as a dependent on your personal tax return and let her simply claim the standard deduction. I am assuming the proceeds from the life insurance would be earning some interest from a savings account. Thus, your daughter would have some interest income that is a reportable on her tax return. The standard deduction that she is entitled as a single filer will most likely offset any taxable income that arises from the interest income (earned from proceeds of the life insurance policy).[/quote]