Are life insurance annuities taxable?

Question

We are to receive monthly payments from a liability settlement (details are too painful to go into here). Will these payments be taxable as well as the initial bulk payment of half of the liability amount?

Answer 1

Annuities are tax deferred.  You do not pay tax on them until you take money out.  If the annuity is an IRA account when you take money out it will be 100% taxable as amy traditional IRA will be.

If the annuity is not an IRA then when you take money from it you will pay tax on what you take out that has been gained.

Therefore:

If you invested $50,000 in the annuity and it is now worth $100,000 you would pay tax on the earnings of $50,000.  Earning come out first - then your cost basis.

Answer 2

http://www.irs.gov/publications/p575/ar0...

Yes, unless it is a tax-sheltered annuity.  If you receive income from one or more annuities, the taxable amounts can vary based on how much you invested in the annuity contracts. Any amounts that you received from an employer plan where you did not contribute to the annuity are fully taxable in the year received. If you invested in the annuity, you are not taxed on the amounts received that are deemed a return of your costs.

Answer 3

Yes. Go to www.irs.gov for more info.