Publication 939
taxmap/pubs/p939001.htm#en_us_publink100094769This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). These payments are also known as
amounts received as an annuity.
 If you receive an amount from your plan that is a
nonperiodic payment
(amount not received as an annuity), see
Taxation of Nonperiodic Payments
in Publication
575. 
In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. The amount of each payment that is more than the part that represents your net cost is taxable. Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. These terms are explained in the following
discussions.
taxmap/pubs/p939001.htm#en_us_publink100094771In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the
contract.
First, find your
net cost
of the contract as of the annuity starting date (defined later). To find this amount, you must first figure the total premiums, contributions, or other amounts paid. This includes the amounts your employer contributed if you were required to include these amounts in income. It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee
contributions).
From this
total cost
you subtract:
 Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first
payment.
 Any additional premiums paid for double indemnity or disability
benefits.
 Any other taxfree amounts you received under the contract or plan before the later of the dates in
(1).
taxmap/pubs/p939001.htm#en_us_publink100094772is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes
fixed.
taxmap/pubs/p939001.htm#en_us_publink100094773On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. The annuity starting date is July 1. This is the date you use in figuring your investment in the contract and your expected return (discussed
later).
taxmap/pubs/p939001.htm#en_us_publink100094774If any of the following items apply, adjust (add or subtract) your total cost to find your net
cost.
taxmap/pubs/p939001.htm#en_us_publink100094775If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. The contributions that apply
are:
 Contributions before 1963 by your employer,
 Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or
 Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to
you.
taxmap/pubs/p939001.htm#en_us_publink1000308051In determining your cost, special rules apply if you are a U.S. citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Your contributions and your employer's contributions are not included in your cost if the
contributions:
 Were made based on compensation which was for services performed outside the United States which you were a nonresident alien,
and
 Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were
performed.
taxmap/pubs/p939001.htm#en_us_publink100094776If you are the
beneficiary
of a deceased employee (or former employee), who died
before
August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit
exclusion.
taxmap/pubs/p939001.htm#en_us_publink100094777If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Add it to the cost or unrecovered cost of the annuity at the annuity starting date. See
Example 3 under
Computation Under General Rule
for an illustration of the adjustment to the cost of the contract.
taxmap/pubs/p939001.htm#en_us_publink100094779Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. This is the unrecovered investment in the contract as of the annuity starting date. If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the
contract.
taxmap/pubs/p939001.htm#en_us_publink100094780Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Your annuity contract has a refund feature if:
 The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more
individuals,
 The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death,
and
 The payments are a refund of the amount you paid for the annuity
contract.
If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see
How To Use Actuarial Tables, later) to find the investment in the contract.
taxmap/pubs/p939001.htm#en_us_publink100094781For a joint and survivor annuity, the value of the refund feature is
zero
if:
 Both annuitants are age 74 or younger,
 The payments are guaranteed for less than 21/2 years,
and
 The survivor's annuity is at least 50% of the first annuitant's
annuity.
For a singlelife annuity without survivor benefit, the value of the refund feature is
zero if:
 The payments are guaranteed for less than 21/2 years,
and
 The annuitant is:
 Age 57 or younger (if using the new (unisex) annuity tables),
 Age 42 or younger (if male and using the old annuity tables),
or
 Age 47 or younger (if female and using the old annuity tables).
If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following
discussion.
taxmap/pubs/p939001.htm#en_us_publink100094782Examples.(p5)
The first example shows how to figure the value of the refund feature when there is only one beneficiary.
Example 2
shows how to figure the value of the refund feature when the contract provides,
in addition to a whole life annuity, one or more temporary life annuities for
the lives of children. In both examples, the taxpayer elects to use Tables V
through VIII. If you need the value of the refund feature for a joint and
survivor annuity, write to the Internal Revenue Service as explained under
Requesting a Ruling on Taxation of Annuity near the end of this publication.
taxmap/pubs/p939001.htm#en_us_publink100094783Example 1.(p5)
At age 65, Barbara bought for $21,053 an annuity with a refund feature. She will get $100 a month for life. Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. In this case, the contract cost and the total guaranteed return are the same ($21,053). Barbara's investment in the contract is figured as follows:
Net cost  $21,053 
Amount to be received annually  $1,200  
Number of years for which payment is guaranteed ($21,053 divided by
$1,200)  17.54  
Rounded to nearest whole number of years  18  
Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed
payments  15%  
Value of the refund feature (rounded to the nearest dollar)—15% of
$21,053  3,158 
Investment in the contract, adjusted for value of refund
feature  $17,895 
  
If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of
$17,895.
taxmap/pubs/p939001.htm#en_us_publink100094784Example 2.(p5)
John died while still employed. His widow, Eleanor, age 48, receives $171 a month for the rest of her life. John's son, Elmer, age 9, receives $50 a month until he reaches age 18. John's contributions to the retirement fund totaled $7,559.45, with interest on those contributions of $1,602.53. The guarantee or total refund feature of the contract is $9,161.98 ($7,559.45 plus
$1,602.53).
The adjustment in the investment in the contract is figured as
follows:
A)  Expected return:*   
 1)  Widow's expected return:   
  Annual annuity ($171 × 12)  $2,052  
  Multiplied by factor from Table V   
  (nearest age 48)  34.9  $71,614.80 
 2)  Child's expected return:   
  Annual annuity ($50 × 12)  $600  
  Multiplied by factor from   
  Table VIII (nearest age 9   
  for term of 9 years)  9.0  5,400.00 
 3)  Total expected return   $77,014.80 
B)  Adjustment for refund feature:   
 1)  Contributions (net cost)  $7,559.45 
 2)  Guaranteed amount (contributions of $7,559.45 plus interest of
$1,602.53)  $9,161.98 
 3)  Minus: Expected return under child's (temporary life) annuity
(A(2))  5,400.00 
 4)  Net guaranteed amount  $3,761.98 
 5)  Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761.98 at $171 a month to nearest whole
year))  0% 
 6)  Adjustment required for value of refund feature rounded to the nearest whole dollar
(0% × $3,761.98, the smaller of B(3) or B(6))
 0 
*Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. See the discussion of expected return, later in this publication.

taxmap/pubs/p939001.htm#en_us_publink100094785taxmap/pubs/p939001.htm#en_us_publink100094786Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. The following discussions explain how to figure the expected return with each type of
annuity.
 A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date.

taxmap/pubs/p939001.htm#en_us_publink100094788If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. It is the total amount you will get beginning at the annuity starting date. You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each
period.
taxmap/pubs/p939001.htm#en_us_publink100094789If you are to get annuity payments for the rest of your life, find your expected return as follows. You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. These multiples are set out in actuarial Tables I and V near the end of this publication (see
How To Use Actuarial Tables, later).
You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. See
Adjustments to Tables I, II, V, VI, and VIA
following Table I.
taxmap/pubs/p939001.htm#en_us_publink100094790Henry bought an annuity contract that will give him an annuity of $500 a month for his life. If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows:
Annual payment ($500 × 12 months)  $6,000 
Multiple shown in Table V, age 66  × 19.2 
Expected return  $115,200 
If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19.2 multiple by +.1. His expected return would then be $115,800 ($6,000 ×
19.3).
taxmap/pubs/p939001.htm#en_us_publink100094791With this type of annuity, you are to get annuity payments either for the rest of your life
or
until the end of a specified period, whichever period is shorter. To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified
period.
taxmap/pubs/p939001.htm#en_us_publink100094792Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. She was age 65 at her birthday nearest the annuity starting date. She figures the expected return as follows:
Annual payment ($200 × 12 months)  $2,400 
Multiple shown in Table VIII, age 65, 5year term  × 4.9 
Expected return  $11,760 
 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. See
Special Elections,
later. 
taxmap/pubs/p939001.htm#en_us_publink100094794If you have an annuity that pays you a periodic income for life and after your death provides an
identical
lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. See
Adjustments to Tables I, II, V, VI, and VIA
following Table I near the end of this publication.
taxmap/pubs/p939001.htm#en_us_publink100094795John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. The expected return is figured as follows:
Annual payment ($500 × 12 months)  $6,000 
Multiple shown in Table VI, ages 67 and 70  × 22.0 
Expected return  $132,000 
taxmap/pubs/p939001.htm#en_us_publink100094796If your contract provides that payments to a survivor annuitant will be
different
from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the
survivor.
taxmap/pubs/p939001.htm#en_us_publink100094797Example 1.(p6)
Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows:
Combined multiple for Gerald and Mary, ages 70 and 67 (from Table
VI)   22.0 
Multiple for Gerald, age 70 (from Table V)   16.0 
Difference: Multiple applicable to Mary   6.0 
Gerald's annual payment ($500 × 12)  $6,000  
Gerald's multiple  16.0  
Gerald's expected return   $96,000 
Mary's annual payment ($350 × 12)  $4,200  
Mary's multiple  6.0  
Mary's expected return   25,200 
Total expected return under the contract   $121,200 
taxmap/pubs/p939001.htm#en_us_publink100094798Example 2.(p7)
Your husband died while still employed. Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age
18.
You were 50 years old at the annuity starting date. Marie was 16 and Jean was 14. Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows:
Widow, age 50 (multiple from Table V—33.1 × $4,800 annual
payment)  $158,880 
Marie, age 16 for 2 years duration (multiple from Table VIII—2.0 × $1,800 annual
payment)  3,600 
Jean, age 14 for 4 years duration (multiple from Table VIII—4.0 × $1,800 annual
payment)  7,200 
Total expected return  $169,680 
No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting
date.
taxmap/pubs/p939001.htm#en_us_publink100094799Note.Variable annuities use a different computation for determining the exclusion amounts. See
Variable annuities later.
Under the General Rule, you figure the taxable part of your annuity by using the following
steps:
taxmap/pubs/p939001.htm#en_us_publink100094800Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. See
Death benefit exclusion, earlier.
taxmap/pubs/p939001.htm#en_us_publink100094801Figure your expected return.
taxmap/pubs/p939001.htm#en_us_publink100094802Divide Step 1 by Step 2 and round to three decimal places. This will give you the
exclusion percentage.
taxmap/pubs/p939001.htm#en_us_publink100094803Multiply the
exclusion percentage
by the first regular periodic payment. The result is the taxfree part of each pension or annuity
payment.
The taxfree part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net
cost.
Each annuitant applies the same exclusion percentage to his or her initial payment called for in the
contract.
taxmap/pubs/p939001.htm#en_us_publink100094804Multiply the taxfree part of each payment (step 4) by the number of payments received during the year. This will give you the taxfree part of the total payment for the
year.
 In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. This fractional amount is multiplied by your exclusion percentage to get the taxfree
part. 
taxmap/pubs/p939001.htm#en_us_publink100094806Subtract the taxfree part from the total payment you received. The rest is the taxable part of your pension or
annuity.
taxmap/pubs/p939001.htm#en_us_publink100094807Example 1.(p7)
You purchased an annuity with an investment in the contract of $10,800. Under its terms, the annuity will pay you $100 a month for life. The multiple for your age (age 65) is 20.0 as shown in Table V. Your expected return is $24,000 (20 × 12 × $100). Your cost of $10,800, divided by your expected return of $24,000, equals 45.0%. This is the percentage you will not have to include in income.
Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments).
taxmap/pubs/p939001.htm#en_us_publink100094808Example 2.(p7)
Gerald bought a joint and survivor annuity. Gerald's investment in the contract is $62,712 and the expected return is $121,200. The exclusion percentage is 51.7% ($62,712 ÷ $121,200). Gerald will receive $500 a month ($6,000 a year). Each year, until his net cost is recovered, $3,102 (51.7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. If Gerald dies, his wife will receive $350 a month ($4,200 a year). If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51.7%). Each year, until the entire net cost is recovered, his wife will receive $2,171.40 (51.7% of her payments received of $4,200) tax free. She will include $2,028.60 ($4,200 − $2,171.40) in her income tax
return.
taxmap/pubs/p939001.htm#en_us_publink100094809Example 3.(p7)
Using the same facts as
Example 2 under
Different payments to survivor,
you are to receive an annual annuity of $4,800 until you die or remarry. Your two daughters each receive annual annuities of $1,800 until they reach age 18. Your husband contributed $25,576 to the plan. You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996.
Adjusted Investment in the Contract
Contributions  $25,576 
Plus: Death benefit exclusion  5,000 
Adjusted investment in the contract  $30,576 
The total expected return, as previously figured (in
Example 2 under
Different payments to survivor),
is $169,680. The exclusion percentage of 18.0% ($30,576 ÷ $169,680) applies
to the annuity payments you and each of your daughters receive. Each full year
$864 (18.0% × $4,800) will be tax free to you, and you must include $3,936
in your income tax return. Each year, until age 18, $324 (18.0% × $1,800)
of each of your daughters' payments will be tax free and each must include the
balance, $1,476, as income on her own income tax return.
taxmap/pubs/p939001.htm#en_us_publink100094810If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year.
If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the
year.
If you received a fractional payment, follow Step 5, discussed earlier. This gives you the taxfree part of your total
payment.
taxmap/pubs/p939001.htm#en_us_publink100094811On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. The applicable multiple from Table V is 23.3 (age 61). Her expected return is $34,950 ($125 × 12 × 23.3). Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63.1%. Each payment received will consist of 63.1% return of cost and 36.9% taxable income, until her net cost of the contract is fully recovered. During the first year, Mary received three payments of $125, or $375, of which $236.63 (63.1% × $375) is a return of cost. The remaining $138.37 is included in
income.
taxmap/pubs/p939001.htm#en_us_publink100094812The taxfree amount remains the same as the amount figured at the annuity starting date, even if the payment increases. All increases in the installment payments are fully
taxable.
However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1.725(a)(5) of the
regulations.
taxmap/pubs/p939001.htm#en_us_publink100094813Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. In figuring the taxable part, Joe elects to use Tables V through VIII. The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20.0 × $1,764 annual payment). The exclusion percentage is $7,938 ÷ $35,280, or 22.5%. During the year he received 11 monthly payments of $147, or $1,617. Of this amount, 22.5% × $147 × 11 ($363.83) is tax free as a return of cost and the balance of $1,253.17 is
taxable.
Later, because of a costofliving increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). The taxfree part is still only 22.5% of the annuity payments as of the annuity starting date (22.5% × $147 × 12 = $396.90 for a full year). The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully
taxable.
taxmap/pubs/p939001.htm#en_us_publink100094814For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the
contract.
If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial
table.
taxmap/pubs/p939001.htm#en_us_publink100094815Frank purchased a variable annuity at age 65. The total cost of the contract was $12,000. The annuity starting date is January 1 of the year of purchase. His annuity will be paid, starting July 1, in variable annual installments for his life. The taxfree amount of each payment, until he has recovered his cost of his contract, is:
Investment in the contract  $12,000 
Number of expected annual payments (multiple for age 65 from Table
V)  20 
Taxfree amount of each payment ($12,000 ÷ 20)  $600 
If Frank's first payment is $920, he includes only $320 ($920 − $600) in
his gross income.
If the
taxfree amount for a year is more than the payments you receive
in that year, you may choose, when you receive the next payment, to refigure the taxfree part. Divide the amount of the periodic taxfree part that is more than the payment you received by the remaining number of payments you expect. The result is added to the previously figured periodic taxfree part. The sum is the amount of each future payment that will be tax
free.
taxmap/pubs/p939001.htm#en_us_publink100094816Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Since the $500 payment is less than the $600 annual taxfree amount, he may choose to refigure his taxfree part when he receives his $1,200 (third year) payment, as follows:
Amount tax free in second year  $600.00 
Amount received in second year  500.00 
Difference  $100.00 
Number of remaining payments after the first 2 payments (age 67, from Table
V)  18.4 
Amount to be added to previously determined annual taxfree part ($100 ÷
18.4)  $5.43 
Revised annual taxfree part for third and later years ($600 +
$5.43)  $605.43 
Amount taxable in third year
($1,200 − $605.43)
 $594.57 
taxmap/pubs/p939001.htm#en_us_publink100094817you must file a statement with your income tax return stating that you are refiguring the taxfree amount in accordance with the rules of section 1.72–4(d)(3) of the Income Tax Regulations. The statement must also show the following information:
 The annuity starting date and your age on that date.
 The first day of the first period for which you received an annuity payment in the current
year.
 Your investment in the contract as originally figured.
 The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax
year.
taxmap/pubs/p939001.htm#en_us_publink100094818Your annuity starting date determines the total amount of annuity income that you can exclude from income over the
years.
taxmap/pubs/p939001.htm#en_us_publink100094819If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). This is the
unrecovered investment in the contract
as of the annuity starting date.
If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. This deduction is not subject to the 2%ofadjustedgrossincome
limit.
taxmap/pubs/p939001.htm#en_us_publink100094820Example 1.(p9)
Your annuity starting date is after 1986. Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. There is no refund feature. Your monthly annuity payment is $833.33. Your exclusion ratio is 12% and you exclude $100 a month. Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Thereafter, your annuity payments are fully
taxable.
taxmap/pubs/p939001.htm#en_us_publink100094821Example 2.(p9)
The facts are the same as in
Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. The exclusion ratio is 10.8%, and your monthly exclusion is $90. After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under
Adjustments.
taxmap/pubs/p939001.htm#en_us_publink100094822If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your investment in the
contract.