Annuity taxes are taxes paid on the benefits from an annuity. The tax implications of annuities and other retirement planning tools are an important thing to consider when sitting down to make plans for retirement. Tax attorneys and personal finance advisors can provide people with assistance when they are preparing to select retirement plans, including a discussion of the tax issues involved. As a general rule, annuities do not have tax benefits in the same way that retirement plans like individual retirement accounts (IRAs) and 401(k) accounts do.
Annuities are a form of insurance product. People can pay a lump sum for an annuity or make a series of payments. The money is invested, and when people retire, they receive benefits from the annuity, available in lump sum form as well as monthly payouts. Annuities are intended to provide supplemental income and are usually paired with other retirement planning options to provide as much protection as possible.
When funds are being paid into an annuity, they may be eligible for tax deferments, depending on how the annuity is structured. Once the annuity starts paying out, however, annuity taxes are due. The taxes are charged on the difference between the amount paid in and the amount paid out. Essentially, the annuity benefits are treated like a form of investment income. However, annuity taxes are not eligible for capital gains benefits; people pay taxes on their annuities like they would pay for regular income.
This can become quite costly for someone in a high tax bracket. In the case of a lump sum payment, people will be expected to pay taxes all at once on the annuity payout. If payments are received monthly, beneficiaries will pay annuity taxes on the investment income included in each payment. Failure to document annuity payouts and pay annuity taxes can have serious legal consequences, as the government will treat this as tax evasion.
Treating part of annuity benefits like regular income can have serious tax disadvantages. For this reason, people are often encouraged to seek out other kinds of retirement products before turning to an annuity. If an employer has a retirement planning program available, it often provides better short and long term benefits, including tax breaks on retirement income. If an annuity is the only choice available, people should do their research carefully and talk about the different options with a financial planner to choose the product most suited to their needs.