Thursday, June 03, 2004
Recent Client Question. www.legacyannuities.com
What can I do about taxes on my annuity?
As an annuity owner, you purchased your annuity with certain common goals in mind:
1. Safety of Principle
2. Tax Advantaged Compounding
3. To Avoid Probate
4. Possible Passing of Annuities to Heirs
5. Maximize After-Tax Account Values
6. To Create Future Income
The Problem
As your account values grow, you are increasing the taxable gain due in the future when you either need income, or upon your death. According to the Tax Code, all gains in an annuity contract are taxable upon redemption or death. The only exception to defraying the taxable gain is if you pass the annuity to your surviving spouse. This can create an even bigger tax trap when your spouse dies. In addition to income taxes, the deferred gain and the principle may also be subject to estate taxes. Without proper tax planning and estate planning, the taxes will come due all at once, therefore subjecting you or your estate to the maximum tax brackets. As time goes on, the tax problems compound.
The Solution
Due to a little known provision in the Tax Code, an annuity owner can change the character of future accumulations to provide tax-free income and a tax-free benefit to their heirs and still have safety of principle and avoid probate. Unfortunately, the gains you have accumulated to date in your annuity cannot avoid income taxation. However, you can greatly lower these income taxes through proper tax planning. The key to solving the tax timebomb dilemma is to change the nature of the accumulation to a tax-free status before the problem gets worse.
Some of the IRS exemptions that may apply to your situation are:
1. The exclusion ratio rule which allows regular distributions from an annuity contract to be mostly tax-free.
2. The establishment of little known trusts to avoid estate taxes.
3. The use of special insurance contracts that provide for both tax-free income and tax-free benefits to heirs.
4. Gifting strategies to reduce or eliminate income taxes and estate taxes.
What can I do about taxes on my annuity?
As an annuity owner, you purchased your annuity with certain common goals in mind:
1. Safety of Principle
2. Tax Advantaged Compounding
3. To Avoid Probate
4. Possible Passing of Annuities to Heirs
5. Maximize After-Tax Account Values
6. To Create Future Income
The Problem
As your account values grow, you are increasing the taxable gain due in the future when you either need income, or upon your death. According to the Tax Code, all gains in an annuity contract are taxable upon redemption or death. The only exception to defraying the taxable gain is if you pass the annuity to your surviving spouse. This can create an even bigger tax trap when your spouse dies. In addition to income taxes, the deferred gain and the principle may also be subject to estate taxes. Without proper tax planning and estate planning, the taxes will come due all at once, therefore subjecting you or your estate to the maximum tax brackets. As time goes on, the tax problems compound.
The Solution
Due to a little known provision in the Tax Code, an annuity owner can change the character of future accumulations to provide tax-free income and a tax-free benefit to their heirs and still have safety of principle and avoid probate. Unfortunately, the gains you have accumulated to date in your annuity cannot avoid income taxation. However, you can greatly lower these income taxes through proper tax planning. The key to solving the tax timebomb dilemma is to change the nature of the accumulation to a tax-free status before the problem gets worse.
Some of the IRS exemptions that may apply to your situation are:
1. The exclusion ratio rule which allows regular distributions from an annuity contract to be mostly tax-free.
2. The establishment of little known trusts to avoid estate taxes.
3. The use of special insurance contracts that provide for both tax-free income and tax-free benefits to heirs.
4. Gifting strategies to reduce or eliminate income taxes and estate taxes.
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