What is the federal income tax treatment accorded annuities?
The federal income tax treatment accorded annuities, governed by Section 72 of the Internal Revenue Code, has changed over the past 10-15 years. As a result, the specific income tax treatment may vary depending on when the annuity contract was purchased. Annuities purchased prior to August 14, 1982 enjoy somewhat more favorable income tax treatment than do annuities purchased after this date. In general, there is no current income taxation to the policy owner with respect to the interest credits applied to amounts invested in personally owned annuities. Taxation will occur when a portion or all of the cash value is withdrawn, when a loan is made against the cash value, when there is a partial or total surrender of the annuity, or when annuity liquidation begins. The taxable amount equals the excess, if any, of the cash value over the cost basis of the annuity contract. An annuity’s cost basis, which is recovered tax free, generally consists of the premiums paid into the contract (less
