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The Internal Revenue Service has issued a ruling that could cut taxes for some recipients of deferred annuity death benefits.
The ruling, Revenue Ruling 2005-30, applies to deferred annuities purchased since Oct. 21, 1979, by consumers who die before collecting any annuity income payments.
Annuity death benefits may include the “basis,” or the amount the annuity purchaser contributed to the annuity contract, along with investment gains on the purchaser’s contributions.
The beneficiaries who get the annuity death benefits must include the investment gain component in their taxable income, according to Bradford Poston, an IRS passthroughs and special industries specialist.
But Poston concludes that the beneficiaries can treat the gains as “income with respect to a decedent” rather than as ordinary taxable income.
Although the ruling looks on the surface as if it might increase the heirs’ taxes, it really should give heirs a tax break, says Mark Canter, a senior counsel at the American Council of Life Insurers.