Skip to main content

U.S. Tax Treatment of Annuities

Matthew Ledvina


As with life insurance, annuities are tax-favored investments under the Code. Unlike life insurance, however, the primary income tax benefit of an annuity is derived from the compounding effect of the tax deferral on the investment gains within the contract, rather than the avoidance of income tax, as with investment in a life insurance policy. Generally, under § 72(a), gross income includes any amount received as an annuity under an annuity, endowment, or life insurance contract. The income tax effect of an annuity depends, however, on numerous factors, such as whether the tax is being applied to a distribution during the annuity’s accumulation period or annuitization period and whether the distribution occurs after the death of the holder of the annuity contract or after the death of the annuitant (assuming that the holder and the annuitant are different persons).

Section 72: Annuity Contract Defined

To qualify as an annuity, the annuity contract must satisfy the requirements of § 72. An annuity is a contract, generally issued by an insurance company, providing for regular payments to an annuitant and, potentially, to a beneficiary following the annuitant’s death. The Treasury Regulations state that to be considered “amounts received as an annuity,” such amounts should be:

·        received on or after the annuity starting date;

·        payable at regular intervals; and

·        payable over a period of at least one year from the annuity starting date.

 

Further, the total of the amounts payable must be determinable as of the annuity starting date..

Payments may also be considered amounts received as an annuity if they are paid under a variable annuity contract, despite the fact that the total of the amounts payable under the variable contract may not be determinable as of the annuity starting date, if the amounts are to be paid for a definite or determinable time. If, because of positive investment experience in the variable annuity contract or other factors, the payment with respect to the annuity exceeds the investment in the contract (adjusted for any refund feature) divided by the number of anticipated periodic payments, then only part of the payment will be considered an amount received as an annuity. The excess is an “amount not received as an annuity.


Comments

Popular posts from this blog

Best Ways for Americans to Make Donations to International Charities

Donating to a non-profit charitable organization is one of the best ways of helping others who are in need. In general, there are several charities that work for different causes such as providing disaster relief, healthcare facilities for the poor, protecting animals from cruelty, etc. Considering the USA, charities raise billions of dollars each year for the betterment of mankind, the animal kingdom, and the planet Earth. In fact, the annual charity generation in the USA is one of the highest in the world. Among the billions of dollars, most donations are made to the US charities while the remaining small portion goes to the international charitable organizations. No doubt, there are many Americans who are eager to donate their fortune to international charities but due to some reason they don’t. One of the foremost problems is that most international charities do not provide tax deductions to the US citizens and as a result, most people choose to make donations to US charitie...

Navigating Swiss-US Estate Planning: What You Need to Know

  By Matthew Ledvina , JD, LLM (US Taxation)  If you have connections to both Switzerland and the United States, managing your estate—basically, what you own—can be like walking through a maze. Both countries have their own rules, and they don't always play well together. Let's break down some of the tricky areas you might encounter, so you can avoid unpleasant surprises for you and your heirs. Different Rules for Different Lands In Switzerland, if you pass away, the laws of the last place you lived will usually govern what happens to your stuff. This includes both your bank accounts and your real estate, whether they are located in Switzerland or elsewhere. But the United States takes a different approach. The place where real estate is located will have its own set of rules, separate from the rules governing personal property like bank accounts. This can create confusion when estates have assets in both countries. I nheritance: A Tightrope Walk Switzerland has strict rules a...

Things to Consider While Making Donations to Charitable Organizations

Making donations for good causes has been prevailing in the world for many years. However, in a few recent decades, the charity activities increased exponentially and today a huge amount of donations are made every year collectively by individuals and businesses. Among many generous countries in the world, the United States of America is a prominent name. The yearly donations raised by the Americans count in billions of dollars with a significant proportion going to the local charities. While many US donors want to donate more to international charities, there are few reasons that restrict the flow of donations outside the US. While donating to charities is definitely good work, it is important to lay emphasis on various factors associated with it. Some of the most important things that any individual who is willing to make donations should consider are as follows: • Doing a Thorough Research on the Charitable   Organization One of the most important activities that m...