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I am the beneficiary of my deceased sister's annuity. Do I…

I am the beneficiary...

I am the beneficiary of my deceased sister's annuity. Do I have to pay income tax on the money?

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She had not paid tax on the annuity when she bought it.

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Answered in 5 minutes by:
3/20/2018
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 4,795
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***** will be assisting you. There are different types of annuities and taxation is different. What type of annuity is it?

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Customer reply replied 5 months ago
It was a variable.

Ok. I will check on that and get back to you shortly.

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Is it a qualified or non-qualified variable annuity?

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Customer reply replied 5 months ago
It was qualified.

In brief, it is taxable as ordinary income to you. SEE BELOW:

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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.

Taxation at Death – Non-Spousal Beneficiary – At your death, the death benefit will be paid to the non-spousal beneficiaries you have designated. By doing so, the transfer will avoid probate. Unlike most other securities, there is no step-up in cost basis at your death. Instead, any deferred income in the policy will be taxable to the beneficiaries as ordinary income at their tax rates. If a death benefit is paid out that is higher than the account value, the difference between the death benefit and the amount you invested, adjusted for any withdrawals, will be taxable as ordinary income to the beneficiaries. The value of the variable annuity policy also will be included in your estate for estate tax purposes. Beneficiaries have the choice of taking a lump sum payment or receiving the payments over a period of time, thereby spreading out the income tax liability.

REFERENCE SOURCE:

https://www.edwardjones.com/investments-services/insurance/annuities/taxation.html

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Tax.appeal.168, Tax Accountant
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