The Key West citizen. [volume] (Key West, Fla.) 1879-current, 1954-08-11
Taxpayers Will Get Break In
New Rule On Insurance Tax
By CHARLES 2. BARRETT

WIIlOu L0AH&yCAO Wa ~ SSA
cut under new rules for taxing
income from annuities or life in
surance included in the giant tai
revision act just passed by Con
gress.
The new rules apply to income
received after last Dec. 81.
In annuities, you generally pay
10 much a year to an insurance
company. Then at a fixed age Of
wear for the rest of your life, Of
for a fixed number of years.
The big question, taxwise, is how
much of the money paid to you il
simply a return of the money YOU
paid in-and how much is Interest
or profit and therefore taxable.
Under the old law, you FRS
figured the total amount you PAID
in-the total cost Of the policy tt
YOU. Then you were taxed eac!
wear on 3 per cent of that cost
The remaining annuity income was
tax-free.
For example, say a policy cos
YOU SIC, 800 and at age 65 you were
"a get back $500 each year fol
the rest of your life. Under the ole
law. 3 per cent Of $1O,sOO, or 1927
would be considered taxable IN
come each year. The other 1878
wear would not be counted Is In
come for tax purposes.
This would continue until thu
Se73 Of tax-free income . veal
added up to the cost Of the policy
or $1O.s0O. From then on-in THU
example from the 18th year on
you would be taxed on the full
$1,000 q year:
This sudden increase in take!
was considered a hardship in many
cases.
Under The new law, you hrs
figure your total cost just as be
fore. Then you figure your re
naming years Of life expectancy
or the fixed number Of years, Owe
which you are to receive repay
ments. Then you divide your cos
BY this number Of years. That Il
the amount of income you can re
ceive tax-free, and the rest is tan
able.
In the example above, say yo'
had a life expectancy of 10 years
or a fixed 10 years in which thu
policy says you are to receive
$1,000 a year. Your total cost o
$40, 900, divided by 10, amounts t
s1,O9O-and that amount of annua
income is considered tax free. Yo'
would pay taxes on the remain
ing $40 each year.
These amounts would remain tn
same throughout-even after yo'
had recovered the full cost of you
policy, and even if you actual!
lived longer than your life expec
fancy.
Thus, under the old law, yo'
would pay taxes on 1927 a year TO-
a while and then you would pa!
taxes on 1900 a year. Under thu
new law you would pay taxes Of
only $110 a year throughout.
The new rules are different il
cases where an employer contrib
utes much Of the cost of an annu
lty or pension policy to an EN-
ploye. If the employee receives bacl
all of his cost within the first three
years of payments to him, h
doesn't pay any tax during thos'
first three years. Then after thre'
years, he pays income taxes Of
the full amount he receives.
Experts estimate this would ap
DIV in IS per cent Of the case
where employers contribute to pen
sion or annuity contracts. So tn
new life expectancy rules vii
chiefly benefit those who buy com
mercial annuity policies on thei
own.
There's one helpful provision il
the new act. You don't have to 6
through complex arithmetic to fig
ure how much of your annuity 1
taxable. The insurance company
when it starts payments to you
will compute your life expectanc,
and tell you how much Of you
annuity income will be taxable.
Another provision gives a biI
cut in testate taxes. Under the oil
law, If you paid premiums on
life insurance policy, proceeds o
the policy were considered part o
YOUR estate when you died. You
survivors paid an estate tax o.
them. But from now on If yo'
make the policy irrevocably pay
able to your beneficiary, 1t is no
included as part Of your taxable
estate. This provision alone is ex
pected to reduce taxes about 2
million dollars for about 10000 tax
PAYERS each year.
But another change will increas
taxes for some. Under the old law
,he beneficiary Of a life INSURANCE
nolicy could leave the princips
with the insurance company an
o;ya tax.free interest in annua