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.

Requirements for Alimony to be Deductible

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Individuals that pay alimony (also known as “spousal support” or “spousal maintenance”) to a former spouse can deduct these payments on their personal federal income tax returns. In turn, the alimony recipient is required to claim the payments as income.

Before a payor takes an alimony deduction they should make sure that their payments meet the IRS qualifications for alimony. Ideally, this was addressed and discussed in detail with their divorce attorney to ensure that the alimony was structured in a way that would allow a deduction. If you are not sure whether your payments are deductible you should consult with a family law or tax attorney. Here are some tips regarding what does and does not meet the general requirements for payments to qualify as alimony under the Internal Revenue Code.

Alimony is Formally Mandated

According to the IRS, alimony payments must be mandated by a legal settlement agreement or court order to qualify for the tax deduction. This means that there must be a legally binding agreement, such as a temporary support order, separation agreement or divorce decree, that describes and mandates the support provided by one spouse to the other. The IRS does not consider voluntary, informal payments of money to a spouse or former spouse to be alimony.

Child Support Is Not Alimony

Child support is not alimony and those who pay child support cannot deduct these payments from their income. Under federal tax laws, child support is not tax deductible by the parent who pays it, and does notneed to be reported as taxable income by the parent who receives the payments.

Cash Payments Only

Non-cash property transfers don’t count as alimony and cannot be deducted from one’s taxable income. Alimony must be paid in cash, or by check or money order, in order to satisfy the statutory requirements.

Third Party Payments

In some cases, court-ordered payments to third parties can be considered alimony and are therefore tax deductible. Examples of this include rent or medical expense payments. In addition, payments made on taxes, mortgages or insurance may also be entirely or partially tax deductible if treated as alimony under a divorce or separation agreement.

Complications Can Arise if You Still Live With Your Ex-Spouse

According to the IRS, a person who is legally separated from his or her spouse, yet still lives in the same home with him or her cannot normally claim a tax deduction on alimony payments. An exception to this rule exists when one spouse leaves the home within one month after receiving an alimony payment. In those states that recognize legal separation, those who are still living with their former spouse and have a legally binding support agreement but are not legally separated, should talk to their attorney or tax adviser to find out whether their payments qualify for a deduction.

About the Author

Scott Morgan is a board certified Austin divorce lawyer who regularly blogs on the subject of divorce and family law. You can read his blog at AustinDivorceSpecialist.com.

IRS Becomes More Lenient in Light of Recession

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The IRS typically resorts to a lien system when it has difficulty collecting taxes from individuals for a long period of time. These liens can make it hard for a person to qualify for insurance, housing, or even find a job. In effect, a lien gives the IRS access to a person’s property if the person owes enough in back taxes. This process can destroy a person’s credit rating. Since the country is working to recover from a recession, it is important that individuals have access to these opportunities to create more income. The IRS has agreed to change its lien methods so that there will be less pressure on the already strained economy.

Reducing Number of Liens

The first step in reducing the number of liens that the IRS is using is to change the amount of taxes owed that causes a lien to be placed. Until this year, a lien was put in place if an individual owed $5,000 or more in back taxes. This year, a person must owe at least $10,000 before the IRS will put a lien in place. That change alone will allow thousands of individuals to continue to make payments on their taxes without the additional pressure that a lien can cause. It will also help keep the economy moving forward because more people will be able to find work and purchase large ticket items.

Easier Lien Withdrawal

The IRS is also willing to be more flexible with individuals who are already paying on liens that were imposed previously. It is easier for someone to establish a payment plan so that they can have their lien withdrawn by the IRS. Having a lien withdrawn will immediately begin to repair the person’s credit rating so that he or she can take the necessary steps to begin paying off the tax obligation without suffering from the severe penalties a lien creates.

Delayed Payment Options

There are some ways that individuals can avoid a lien altogether. The IRS is becoming more vocal about payment options that could keep people out of serious trouble. The first step is to file your tax return on time, even if you cannot afford to make your tax payment right away. Once your return is filed, you can begin negotiating with the IRS for different payment options. The IRS will allow most tax payers to delay their payments by 30 or even 60 days in most cases.

Installment Payments

If a short delay in payments is not enough to help you pay the amount that you owe, you can establish an installment plan with the IRS. You will need to talk with an IRS agent about your options for the plan, and you will have to pay additional fees if you must create an installment plan. Keeping an open line of communication with the IRS and cooperating as much as possible will reduce your odds of being actively pursued for the taxes that you owe. The IRS has created many ways for individuals to pay their taxes so that they do not have to resort to liens.

 

Jessica Bosari writes about personal finance for Billeater.com, a site that offers money-saving tips, advice and information. Visit Billeater for more ways to save.