Evening star. [volume] (Washington, D.C.) 1854-1972, 1954-08-11
Eighth Of q Series

In annuities, you generally pay
so much a year to an insurance
company. Then at a fixed age or
year, you get back so much a
year for the rest of your life, or
for a fixed number of years.
The big question, taxwise, is
how much Of the money paid to
you is simply a return of the
money you paid in-and how
much is interest or profit and
therefore taxable.
Under the old law, you first
figured the total amount you
paid in-the total cost Of the
policy to you. Then you were
taxed each year on 3 per cent Of
that cost. The remaining annu-
ity income was tax-free.
For example, say a policy cost
you $4,000 and at age 65 you
were to get back ST. 200 each year
for the rest of your life. Under
the old law. per cent of SIC, 300,
or 1927, would be considered tax
able income each year. The
other 1878 year would not be
counted as income for tax pur-
poses.
This would continue until the
1878 of tax-free income a year
added up to the cost of the policy,
or $4,000. From then on-in
this example from the 18th year
on-you would be taxed on the
full $1,000 a year.
Was Considered Hardship.
This sudden increase in taxes
was considered q hardship in
many cases.
Under the new law, you first
figure your total cost just as be-
fore. Then you figure your re-
manning years of life expectancy,
or the fixed number Of years,
over which you are to receive re-
payments. Then you divide your
cost by this number Of years.
That is the amount of income
you can receive tax-free, and the
rest is taxable.
In the example above. say you
had a life expectancy Of 10 years,
or a fixed 10 years in which the
policy says you are to receive
$1,000 year. Your total cost OF
$4,000, divided by 10. amounts
to ,090-and that amount Of
annual income is considered tax
free. You would pay taxes on the
remaining $110 each year.
These amounts would remain
the same throughout-even after
you had recovered the full cost
Of your policy, and even If you
actually lived longer than your
life expectancy.
Thus, under the old law. you
would pay taxes on 1927 a year
for a while and then you would
pay taxes on $1,000 a year. I'm
der the new law you would pay
taxes on only $110 q year
throughout.
New Rules Differ.
The new rules are different
In cases where an employer con-
tributes much Of the cost of an
annuity or pension policy to an
employe. II the employee receives
back all of his cost within the
first three years Of payments
to him, he doesn't pay any tax
during those first three years.
Then after three years. he pays
income taxes on the full amount
he receives.
Experts estimate this would
apply in IS per cent of the cases
where employers contribute to
pension or annuity contracts. So
the new life expectancy rules
will chiefly benefit those who buy
commercial annuity policies on
their own.
There's one helpful provision
in the new act You don't have
to go through complex arith-
metic to figure how much of your
annuity is taxable. The inSur-
ance company, when it starts
payments to you, will compute
your life expectancy and tell you
how much of your annuity in
come will be taxable.
Another provision gives a big
cut in estate taxes. Under the
old law. if you paid premiums
on a life insurance policy, pro-
ceeds of the policy were consid-
cred part of your estate when
you died. Your survivors paid
an estate tax on them. But from
now on if you make the policy
irrevocably payable to your ben
ef1ciary. it is not included as part
of your taxable estate. This