Throughout your working life, you may have set aside money for the future so that you would have income in retirement. But, while income generation is a key component for a successful financial future, it is also important to have an estimate of the amount you can keep for paying your living expenses, and the amount that you “owe” Uncle Sam. So, if some of your incoming cash flow is generated by an annuity, knowing how to report annuity income on your tax return is essential.
Taxation of Annuity Income
Based on the type of annuity you have, some or all of the income could be taxable. For instance, with a qualified annuity, it is likely that none of your contributions have yet been taxed. Rather, the money was likely deposited into a traditional IRA and/or employer-sponsored retirement plan pre-tax.
Because the funds in these types of plans grow tax-deferred, neither the contributions nor the gains have been taxed – and at some point, Uncle Sam will want “his” money. Therefore, 100% of the withdrawals from qualified annuities are taxable.
Conversely, the contributions that are made to a non-qualified annuity are typically made with “after-tax” dollars, meaning that these funds have already been taxed (usually as ordinary income in the year earned).
Similar to a qualified annuity, though, the gains that take place in a non-qualified annuity are tax-deferred. Therefore, when you begin taking income or withdrawals from a non-qualified annuity, a portion of each payment will be considered taxable gain, and another portion will be non-taxable return of principal. The non-taxable portion is referred to as the exclusion ratio.
Reporting Income from an Annuity on Your Tax Return
Annuity income will typically have to be reported on your annual tax return. If you received any income from an annuity during a tax year, the amount should be noted on line 16 of IRS Form 1040.
This information is broken down even further into two categories. In this case, the space next to 16a reports the gross amount of the distribution(s) you received from the annuity. On line 16b, you will report the taxable portion of the annuity income you received. If you are also required to file a state income tax return, annuity income must be noted on Form 1099-R.
Based on IRS rules, if you receive annuity payments before you have reached age 59 ½, you may incur an additional 10% “early withdrawal” penalty. There are, however, some exceptions to this rule, including the receipt of “substantially equal periodic payments,” annuity distributions made because you are disabled, or distributions received if you are age 55 (or older) and are separated from employment service.
Need More Information About Annuities for Retirement Income?
Annuities can provide you with many nice benefits – including a stream of income that continues for the remainder of your lifetime. But they can also be somewhat complicated. So, if you have any questions regarding annuities, please feel free to reach out to us and we will be happy to help.
At Annuity Gator, our primary mission is on educating consumers about annuities and how they work. You can contact us directly by calling (888) 440-2468 or you can send us an email to our secure online contact form. We look forward to assisting you.