Tax Liability Of An Annuity – Does It Exist?

Tax Act

Tax Liability Of An Annuity

Everybody is interested in avoiding taxation legally because no one likes to pay taxes. There is generally no tax liability in case of annuities and this is what makes it so popular. After all, ‘a penny saved is a penny earned’ therefore why not invest in these since they do not require you to pay tax? The tax-deferred growth that one can enjoy from an annuity is probably one of the most attractive features about it. The government isn’t going to tax you on any of the earnings as long as the money stays inside the annuity. Thus, if you were filing for 2009 taxes then your annuity wouldn’t come under it.

However, it cannot remain like this forever since all good things should come to an end. Therefore your deferred annuity will get taxed in its later stages. To understand this, it is necessary to take a look at the two stages of a deferred annuity. The accumulation phase is the first phase and during this phase the annuity is allowed to grow and there is no tax liability on it.

In the second phase, i.e. the distribution phase, the annuity is paid out and the payment can be made in a single lump sum or it can be segregated into a series of payouts at fixed intervals over a lifetime or a pre-determined period of time. It does not matter which mode of payment is opted because the income tax will be due on each of the annuity payment which the recipient receives.

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