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I have a 92 year old mother who is exempt from filing tax…

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I have a 92...

I have a 92 year old mother who is exempt from filing tax returns because of her income. However, she has an annuity account that she has taken funds from in the recent past years. Does she have to file for those reasons?

Accountant's Assistant: The Expert will know how to help. Is there anything else important you think the Expert should know?

No that is it.

Submitted: 10 months ago.Category: Tax
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Answered in 7 minutes by:
9/27/2017
Tax Professional: Tax.appeal.168, Tax Accountant replied 10 months ago
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 4,799
Experience: 3+ decades of varied tax industry exp. Tax Biz owner
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Hello. Thank you for choosing this Q&A service for assistance. My name is Angela. I will be assisting you.

In brief, the answer is yes. If she purchased the annuity with funds in her IRA, and if she used pretax money from an IRA or a 401(k) to purchase the annuity, then all payouts will be fully taxed.

If she used after-tax dollars to buy the annuity, however, then a portion of the payouts will be a tax-free return of her principal. Either way, she'll have to pay any taxes owed on the annuity at her ordinary income-tax rate. The income tax rate will depend on the amount of money she has withdrawn.

Let me know if you require further assistance with this matter. If not, I ask that you be so kind as to scroll to the top of the page and select 3 or more stars to positively rate my response so that I can receive credit for assisting you. A 5 star rating is greatly appreciated.

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Customer reply replied 10 months ago
She bought the annuity from funds from the sale of her home.
Tax Professional: Tax.appeal.168, Tax Accountant replied 10 months ago

Hello again.

You will need to find out if the annuity is a qualified or a non-qualified annuity.

Either way, tax will be involved. SEE BELOW:

------------------------

Qualified Annuity:

A qualified annuity is taxed identically to any other qualified account such as an IRA, 401(k), profit sharing plan or other tax-deferred retirement account.

Non-Qualified Annuity:

Non-qualified annuities are taxed differently from most investments.

Withdrawals – Withdrawals of earnings from a nonqualified annuity are fully taxable at ordinary income tax rates. Unless the annuity was purchased before August 14, 1982, the earnings are considered withdrawn first and are therefore subject to taxation. All withdrawals will be fully taxable as ordinary income until the account value reaches the initial amount invested. Because annuity income is taxable at ordinary income tax rates, you do not receive the benefit of lower capital gains tax rates. Also, if you are under age 59 1/2 when you make the withdrawal, you may be assessed a 10% penalty on any taxable earnings.

Annuitized Payments – If you annuitize a nonqualified annuity, a portion of your payment will be considered a return of premium and will not be subject to ordinary income tax. The amount that is taxable will be determined at the time you elect to annuitize the policy. A calculation will be made by the insurance company to determine the “exclusion ratio,” which will determine the percentage of each payment that will be excluded from income tax.

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