Tax Strategies for Annuities

Changeable annuity proprietors frequently pick up a "good news, negative news" saga from their financial and tax advisors. The excellent news may be that their investment went up in value; the bad news is that once they pass away, their beneficiaries will have to pay income tax on that development. There's, nevertheless, a method to eliminate the "bad news" part of this story and pass more bucks to your loved ones with tax strategies.

Let's take the case of Sally, age 70, a widow with one daughter. After her husband passed away, 10 yrs ago, Sally sold her house and invested part of the cash in a adjustable annuity.
This was smart tax strategy as she did not require money for living expenditures and basically wanted to grow without generating extra annual income tax.

Sally's annuity has nearly doubled in worth over the time she has owned it. However she has lately been reminded that her daughter, who's in the 35% tax bracket, may ultimately need to pay income tax on those gains. Note that 1 element of tax strategies for annuities is always to have a person in the lowest tax bracket pay the taxes.

Since Sally does not need income from her annuity at this time, 1 tax strategy would be to have her daughter buy a life insurance policy on Sally's life for the annuity's value. This could allow the proceeds of the life policy to move income tax totally free when Sally passes away.

To purchase the coverage, Sally may annuitize her variable annuity. She'll receive a lifetime income and be able to offer her daughter enough cash to make the life insurance premium payments. Any of the distributions that Sally does not spend, could be invested to supply for her long term necessities.

You will find yet 2 other tax strategies benefits. At the age of seventy, annuity withdrawals will have a fairly high exclusion ratio which means that most of each payment is a tax-free return of principal. Even better is that Sally is living on a fairly moderate income and it is in the 15% tax bracket. Therefore, by her harvesting the annuity, tax on the income will be paid at 15% rather than allowing the annuity to be inherited by her daughter who would require to pay tax at 35%.

Tax strategy, the thinking ahead of ways to best handle the annuity to reduce taxes, can save significant tax bucks for the loved ones.