Annuity Taxation refers to the tax treatment of annuity income received by an individual or entity. Annuities are financial products that provide a series of payments over time, typically used for retirement income.
In general, the taxation of an annuity depends on how the annuity was funded and the nature of the payments received. When an individual contributes to a qualified annuity (usually with pre-tax dollars), distributions taken during retirement are generally taxed as ordinary income. Conversely, if the annuity is purchased with after-tax dollars, only the earnings portion of the payments is subject to tax, while the principal is not taxed upon withdrawal.
For example, if a retiree receives $1,200 per month from an annuity funded with both principal and interest, only the earnings portion (the interest) would be taxable. The specific tax implications can vary based on the type of annuity, the taxpayer’s income bracket, and other factors, such as whether the annuity is structured as a qualified or non-qualified product.
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