Legislation has been introduced in the Senate that would reduce by half the tax on the income generated by annuities that make lifetime payments.
The legislation, which will be reintroduced in the next Congress in January, is designed to ensure that existing retirement income products have a seat at the table when Social Security revamping is discussed next year.
The bill was introduced by Sen. Gordon Smith, R-Ore., and Sen. Kent Conrad, D-N.D., on Dec. 7. A similar bill was introduced in the House much earlier in the legislative year by Rep. Nancy Johnson, R-Conn. It has a number of sponsors on both sides of the aisle, particularly from House Ways and Means Committee members, according to officials at the Americans for Secure Retirement trade group.
Under the proposal, individuals would not pay federal taxes on one-half of the income generated by annuities that make lifetime payments. There would be an annual limit of $20,000 on the amount an individual could exclude from federal taxes each year. For a typical American in the 25% tax bracket, this would provide an annual tax savings of up to $5,000, representatives of ASR said.
In a floor statement about the bill, Conrad said the bill would apply only to life-contingent, nonqualified annuities. A life-contingent annuity that is subsequently modified to a fixed-term payout would be subject to a recapture tax, he said.