Evening star., 1944-01-27
Your U. 5. Income Tax
(Thts Is No. IS OF a Sertes.)

Annuities have become . popular
form Of investment In recent years
and, because OF the nature OF an
nuity income, special treatment is
required in the preparation Of a
Federal income tax return.
There are several forms of annu-
tiles, but the most common are an
nuity contracts issued by insurance
companies. An endowment insur-
ance policy may be payable to the
beneficiary In monthly or annual
sums for period stipulated in the
policy, frequently for the life Of the
beneficiary; or person may pur-
chase, for a fiat sum, an annuity
policy from an insurance company
which provides him with monthly
or annual income for life. In such
annuity contracts, a portion of the
payments received represents inter-
est on the sum or sums paid for the
policy or contract, and a portion
represents gradual return OF the
principal to the annuitant.
+. Only Portion Taxable.
Only that portion of the payments
which represents interest on the
cost of the policy or contract is tax
able income, and for purposes Of
uniformity the law provides that
this portion shall be considered as
3 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 tax
able income.
Annuity income, accordingly, must
be reported in the Federal income
tax return, whether the annuity is
gift received from some one else,
or received as the proceeds, to a
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
received by the policyholder of an
endowment 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 pol
icy, as stated above, there must be
considered the amount of the an
nuity income received during the
year. The portion of this annuity
income which Is taxable, namely, 8
per cent of the cost of the policy, is
the amount to be entered in item 2
Of short Forum 1040A or item S of
long Form 1040; the balance is nom
taxable and is to be applied against
the cost Of the policy. When the
taxpayer has received nontaxable
income in this manner equaling the
cost Of the policy, thereafter the
whole annuity income each year
must be entered as taxable income.
Apply Elsewhere.
These principles for the treat
ment of annuity income apply also
In general to retirement income, an
nuity pensions and other forms of
annuities. In the case of retirement
income and pensions, where no pay
ments have been made for the in
come, then the whole amount of the
income is taxable Except for pen
sions to war veterans and their
families.
Pensions or retirement pay re-
ceived from employees trusts should
be treated in the same way as an
nuties. If the trust is one which
meets the statutory tests for exemp-
ton from income tax. the amounts
contributed by the employe, if any
constitute his basic cost of the an
nuity; If he made NJ payments te
the trust, his cost is zero. If. how
ever, the trust Is not exempt from
tax, contributions to the trust by
the employer are treated as addi-
tiorial compensation to the employe
taxable to him when credited to the
trust, If his rights to future annu-
ity would not be forfeited by his re-
signation or discharge occurring be-
fore the retirement date Amounts
thus taxed to the employe may be
treated as part of his basic cost of
tho apn1itv