Annuities

[Snaggletooth]

OK, going to reveal my ultimate stupidity about this subject. 'cause I'm not engrained in the securities business very well. Sea-Tax are you still alive and kicking??

Elderly widow has $1.4 million in annuities, and probably another million in deferred retirement accounts. What kind of annuities? I don't really know, but this wealthy widow has been reporting them as tax-exempt income on line 8b.

I've heard of taxpayers buying annuities and the income from them to be tax free. They are mostly with Life Insurance companies. The widow says these annuities are out-of-reach, i.e. inaccessible. There is a section in IRS code that covers this I think.

This is NOT an annuity contract, because the taxpayers have never taken a distribution. All the income has been reinvested for 30-40 years, and the taxpayers have been reporting the income on line 8b. This has caused their social security to be taxed at 85%.

I don't think this is reportable tax-exempt income in the sense of the word. But unless it is truly exempt, then it is either taxable or deferred. And I never knew of a deferred account where the income could be deferred forever.

Two questions: 1)What on earth is this type of security, and 2)Where, if anywhere, should the earnings be reported?

Sorry folks, if I grew up as a rich kid, I probably would know all about this...

[S T]

I will try some??

Snags, Annuties 30 or 40 years ago, not sure, did they even exist back then?? Are we talking endowment contracts or some other type of life insurance?? do you have statements from the issuer?

I can't think of any income that is tax-exempt from an insurance company, but maybe Veritas and Sea Tax know better, but then there might have been some contract years ago! I don't think I have ever seen one in the last 20+ years. A lot of insurance contracts have "tax deferred" and they report to the taxpayer quarterly or annually, but no tax due unless there is a distribution. It just keeps accumulating.

On distribution, the earnings are taxable in excess of the investment, unless of course it is a Variable Annuity and it lost money, as so often they do. But then a 1099R should be issued on any type of distribution. So if t/p is not taking a distribution, no taxable earnings, nor tax exempt, etc.

Most insurance contracts (if any) do not issue "tax exempt" statements of earnings.

Could it be that she is referring to the rules of monies in an Annuity might be exempt for assets if one is trying to qualify for Medi-Cal/Medic-Aid? There are some single premium annuities out there!

Does the t/p receive a year end statement that states that the earnings are "tax-exempt" and if so whom from. Is it a life insurance company or a securities company?

Based on what you offered in your post, a lot of questions!

Sandy

[Snaggletooth]

Unanswered Questions

Yes, Sandy -- you have a gentle way of making me realize there's not enough information in my post. I usually rough up board members who don't give out enough info.

But fact of the matter, I don't really know what these things are and the taxpayer doesn't either. All she has is quarterly statements, and "plan" years of some sort. The plan year usually ends Mar 31, Jun 30, or Sep 30, and sometimes Dec 31. The widow digs out earnings from the quarterly statements, and in prior years has been reporting the earnings on line 8b.

These things (11 of them) might be what you have referred to as "endowment" contracts. Does this mean they will never be taxed on the earnings, but also never have access until the owner dies? The husband died last April 20, but there was something called "spousal continuation."

Veritas and Sea-Tax, are you out there? Thanks Sandy!

[sea-tax]

Sorry Snagg for not replying earlier I have been up to my eyeballs in you no what !
First things first I would have the client call the insurance company and request a copy of the policy or contract. This will serve two purposes , it should let you know what it is exactly that they have and secondly how it is taxed.

I do not think it is an annuity becuase usually annuities are taxed at distribution and prorated part tax part non-tax.
It may be some other kind of investment conduit through insurance, like a whole life or other type of insurance product.
Until we see the policy it is all speculation. Get the client to get the policy then bring it to you then we can talk about it some more. Good luck!

[Zee]

Equity Index Annuity

My guess is your client invested in Equity Index Annuities. These are insurance products where the return is tied to an average of Dow, S&P, or other market performance. Be wary of how the average is calculated. They are generally tax-deferred products, not tax-free. I'm in Florida and could attend breakfast, dinner, and lunch daily at the highest-priced restaurants in town selling these products. I've often wondered how the salesperson could afford to pay for expensive lunches and dinners and so often. Literally, the seminars are offered every day here. They offer a guarantee of principal and a return that appears to exceed Bank CD's, etc. and often a "bonus" amount added to the principal at the onset (sometimes as much as 10%). The disadvantage is they are very long-term, generally 25-40 years and early withdrawal charges can be as high as 25%. The principal guarantee is very attractive to the elderly and the anticipation of higher returns. However, after the first couple of years they often see the high returns reduced to below bank products. The SEC has said they are looking into classifying these products as securities. That's needed. Insurance salesperson's also can earn a commission as much as 10%. So, one sale from the group of a $500,000 annuity can pay $50,000 commission. This isn't disclosed since it's paid by the insurance company. Investor's are told there are no sales charges. I'm very concerned about abuses of this product here in Florida, and did a little research just for the heck of it. By the way, at the bottom of the ads for the "free dinners", etc. you'll typically see a footnote suggesting folks have at least $250,000 to invest, and indicating the seminar is "free" to the general public and $1,500 for other financial advisors, CPA's, tax attorneys to attend. If anyone has any clients thinking about these type of products, a caution might be in order. Some have performed well. Most haven't. And, they are too "new" to have sufficient history. If they may need to access the funds be especially careful.

[Snaggletooth]

Annuities

These are annuities of one kind or another.

Is it possible to keep on deferring income until death?
Then what happens?

[S T]

Again I don't think so

Snags,

I really don't think they are annuities. Do as Sea Tax suggested and contact the Insurance Company to find out what they are.

Most annuities, again as Sea Tax stated, do not issue tax exempt interest/dividends or any type of earnings, unless there is a distribution, and then that would be reported on a 1099R form.

I am thinking that if you have no reporting form such as a 1099B, 1099INT or 1099R form there is nothing taxable each year, any taxable amount will be reported when the distributions are issued.

Equity Index Annuities are relative new, so I don't think that is what they are either , and they still have the same reporting procedures as other annuities.

I really believe what your T/p has something different. More investigation is needed!

Sandy

[sea-tax]

Snagg,
What ever came of this? Did you ever find out what they infact had?

[Kram BergGold]

2006 1099 should help

2006 marked the first year tax exempt income had to be reported to IRS. So I would check to see if taxpayer received a document saying this was reported to IRS.

[veritas]

If your client

has an annuity and no money was distributed during 2006 you are not going to get any 1099.

[veritas]

I have often seen clients

put the deferred earings from annuities and (IRA's) on their tax return as taxable income.

[George Boutwell]

Caveat Medicare Premiums

I really don't think they are annuities. Do as Sea Tax suggested and contact the Insurance Company to find out what they are. Most annuities, again as Sea Tax stated, do not issue tax exempt interest/dividends or any type of earnings, unless there is a distribution, and then that would be reported on a 1099R form.

My clients with annuities -- fixed or variable -- get an annual statement showing the increase in policy value, which they feel obligated to share with me because they tell me everything else.

The problem here is that tax-deferred income, if reported as tax-exempt income, is going to be used erroneously to compute higher Medicare B premiums if the taxpayer's income (counting this amount) exceeds $80,000. She should file an amended return for 2005, and an appeal with Social Security, if that has already happened.