Taxes on qualified and non-qualified annuities
Are beneficiaries of a variable or fixed annuity subject to Federal and State income taxes on the proceeds? Does it make any difference if its a qualified or non-qualified contract? Also would the proceeds be subject to Estate taxes? If so, will the taxes due come out of the proceeds to the beneficiaries?
Permalink Submitted by Alan Spross on Mon, 2007-12-17 22:38
An inherited annuity is an IRD asset, meaning that the beneficiaries will generally be subject to the same tax treatment that the owner would have been had he lived to collect the balance. The balance at death is included in the owner’s gross estate and if subject to federal estate tax, the beneficiaries receive a miscellaneous itemized IRD deduction not subject to the 2% limit.
Whether the contract is qualified or not does not affect the above information. However, along with the age of the contract, annuitization status and date thereof, it may have an affect on how the investment cost (if any) is factored with the earnings when distributions are taken by the beneficiary, ie whether earnings come out first or are pro rated with the cost of the contract.