Good, bad news on annuity taxes | SummitDaily.com
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Good, bad news on annuity taxes

Bob Priest

Dear Mr. Priest: My mother recently passed away and I am the beneficiary on her annuity. Do I have to pay capital gain taxes on the amount I receive?

Teresa – Vail

Dear Teresa: Once again I have good news and bad news. The good news is that you only have to pay taxes on the amount over and above the cost basis of the annuity.

If it is a nonqualified annuity (was not purchased as an IRA or other corporate retirement plan) then your cost basis will be equal to the amount that your deceased mother contributed to the account over her lifetime.

If, on the other hand, the annuity is a qualified annuity, it is likely that the cost basis is equal to zero. If this is the case, you will be taxed on the entire amount in the year you receive the proceeds.

What type of taxes must you pay on the account? With annuities, unlike many other investments, you will be taxed at your ordinary income tax rate on whatever amount is over and above the cost basis.

If you are in a low tax bracket, this rate could actually be lower than the current capital gains rate. However, it is quite possible that your income tax rate will be higher than the capital gains rate.

With many other investment accounts, depending on how long the account was held, you are taxed at long or short-term capital gains rates.

Conversely, the growth from an annuity is normally taxed as ordinary income at the beneficiary’s current income tax rate. Happy planning!

Bob Priest, MBA, CFP, is an independent certified financial planner and registered investment adviser serving clients locally and nationally. He can be reached at (877) BOB PRIEST or on his Web site at

http://www.BobPriestFinancial.com. All opinions herein are those of the author and not of the Summit Daily News or its staff. Submit your financial questions to

Bob@FinancialCompanies.com.


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