Q: What is the tax treatment of dividends where annuity values are paid in installments or as a life income?

A: Dividends received before the annuity start date or the first date that an amount is received as an annuity, whichever is later, are included in the recipient’s gross income to the extent that those dividends, taken with other amounts received under the contract that were excludable from gross income, are greater than the total premiums (or other consideration) paid by the recipient to that date.

Also, dividends thus received must be subtracted from the consideration paid for purposes of the exclusion ratio that will be applied to payments received from the annuity after the date of the dividend.[1]

Dividends received after the annuity start date or the first date that an amount is received as an annuity, whichever is later, are included in full in the recipient’s gross income. Contrary to the case where dividends were received prior to the annuity start date, the exclusion ratio is not affected by dividends received after the annuity start date. The exclusion ratio in place prior to payment of the dividend continues to apply.[2]

 

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[1]

. Treas. Reg. §1.72-11(b)(1).

[2]

. Treas. Reg. §1.72-11(b)(2).

 

The content in this publication is not intended or written to be used, and it cannot be used, for the purposes of avoiding U.S. tax penalties. It is offered with the understanding that the writer is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought.