7.23 Figuring the Taxable Part of Your Annuity

Tax treatment of a distribution depends on whether you receive it before or after the annuity starting date, and on the amount of your investment. A cash withdrawal before age 59½ from an annuity contract is generally subject to a 10% penalty, but there are exceptions; the penalty is discussed at the end of this section. If your annuity is from an employer plan, see 7.26.

The annuity starting date is either the first day of the first period for which you receive a payment or the date on which the obligation under the contract becomes fixed, whichever is later. If your right to an annuity is fixed on June 1, 2013, and your monthly payments start on December 1, 2013, for the period starting November 1, 2013, November 1, 2013 is your annuity starting date.

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image Filing Tip
Surrender of Contract
Payments on a complete surrender of the annuity contract or at maturity are taxable only to the extent they exceed your investment.
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Payments before the annuity starting date.

If your commercial annuity contract was purchased after August 13, 1982, withdrawals before the annuity starting date are taxable to the extent that the cash value of the contract (ignoring any surrender charge), immediately before the distribution, exceeds your investment in the contract at that time. Loans under the contract or pledges ...

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