It doesn't really work like that. The cost basis is being distributed little by little as the annuity is disbursed to you. The annuity company should be entering a different taxable amount from the gross amount, but if not then you should use the 'general rule'. The life expectancy tables are in IRS Publication 939, and the computation. You have all the numbers to enter in your tax return (cost, starting date, expected return).
- Step 1. - Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable.
- Step 2. -Figure your expected return.
- Step 3. -Divide Step 1 by Step 2 and round to three decimal places. This will give you the exclusion percentage.
- Step 4. -Multiply the exclusion percentage by the first regular periodic payment. The result is the tax-free part of each pension or annuity payment.
If you choose not to use the 'general rule' then you will likely pay tax on all of the annuity each year, indefinitely.
@MtnTABS
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