taxes

How to calculate taxes on an annuity

Judy O'ConnorDear Tax Talk,
As the beneficiary of an insurance annuity, I received a lump sum and was informed that $87,000 of it was taxable. At what percentage rate will it be taxed?
-- Allen

Man doing paperwork © Diego Cervo/Shutterstock.com

Dear Allen,
If you were born before Jan. 2, 1936, and the lump-sum distribution is from a qualified retirement annuity, you may be able to elect up to five optional methods of calculating your tax.

If you were born on or after that date or the distribution is not from a qualified retirement annuity, the lump sum you received will be taxed as ordinary income. Not knowing what other income you have, I am unable to tell you at what rate it will be taxed.

You should receive a Form 1099R, Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., from the payer of the lump-sum distribution by Jan. 31, 2015, and it should include instructions for you on reporting the income. If you do qualify for an optional method, you will need to complete Form 4972, Tax on Lump-Sum Distributions.

Thanks for the great question.

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