The Waterbury Democrat., 1944-02-02
YOUR FEDERAL INCOME TAX
No. 25 INCOME FROM MINUTES

Annuities have become a popular
 form of investment in recent years
 and, because of the nature of an-
 nuity income, special treatment is
 required in the preparation of Federal income tax return.
 There are several forms of an-
 nuities, but the most common are
 annuity contracts issled by insur- ance companies. An endowment in-
 surance policy may be payable to
 the beneficiary in monthly or an- nual sums for a period stipulated in
 the policy, frequently for the life of the beneficiary; or person may purchase, for 8 flat sum, an an nuity policy from an insurance company which provides him with 8 monthly or annual income for life. In such annuity contracts, a portion of the payments received represents interest on the sum or sums paid for the policy or con- tracts, and a portion represents a gradual return of the principal to the annuitant.
 Only that portion of the pay ments which represents interest on the cost of the policy or contract is taxable income, and for pur- poses of uniformity the law pro- vides that this portion shall be considered as per cent of the cost until there has been excluded from gross income an amount equal to the principal sum paid for the policy. Thereafter, the entire amount of the annuity is taxable income.
 Annuity income, accordingly, must be reported in the Federal
 income tax return, whether the
 annuity is a gift received from some one else, or received as the proceeds, to 8 beneficiary, of a life insurance policy issued to another.
 If the annuity derives from a straight annuity contract, then the cost to be shown would be the amount of the single premium paid for the policy. If the annuity is re- ceived by the policyholder of an en- dowment insurance contract, pay able in installments to the policy holder, then the cost is the sum of the premiums paid for the policy.
 In addition to the cost of the policy, as stated above, there must | be considered the amount of the annuity income received dur ing the year. The portion l of this annuity income which is | taxable, namely, per cent of the cost of the policy, is the amount to be entered in item 2 of short Form 1040A or item of long Form 1040; the balance is nontaxable and is to be applied against the cost of the policy. When the taxpayer has re- ceived nontaxable income in this manner equaling the cost of the policy, thereafter the whole annuity income each year must be entered as taxable income.
 These principles for the treat ment of annuity income apply also in general to retirement income, annuity pensions, and other forms | of annuities. In the case of retire | ment income and pension, where no payments have been made for | the income, then the whole amount l of the income is taxable (except for pension of War veterans and their | families.)
 Pensions or retirement pay re- celved from employees trusts | should be treated in the same way | as annuitieS. If the trust is one which meets the statutory tests for exemption from income tax. the amounts contributed by the em- ploye, if any, constitute his basic | cost of the annuity; If he made no payments to the trust, his cost is | zero. If. however, the trust is not l exempt for tax, contributions to 1 the trust by the employer are treated as additional compensation l to the employe, taxable to him when credited to the trust, if his rights to future annuity would not be forfeited by his resignation or discharge occurring before the retirement date. Amounts thus tax ed to the employe may be treated | as part of his basic cost of the an- nIlltv