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Veteran Services: Finance Questions

Finances

You're working, and you've got a family that depends on you - both now and down the road. Where do you invest your money? Do you borrow against the equity in your house? Through a preferred provider relationship with USAA, The American Legion can provide expert financial advice to just about any question.

Questions & Answers

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Financial Questions & Answers

Question:

My father left an annuity to me. I have in my hands a check in the amount of the death benefit from it. I do not want to pay taxes on this. What can I do to avoid or defer taxes? – Steve

Answer:

We’re with you; it’s hard to get excited about paying taxes! Unfortunately, Uncle Sam is not on the same sheet of music. As a non-spouse beneficiary of a non-retirement, meaning it’s not an annuity within an IRA, 403(b) or other retirement account, typically any amount above what was invested in the annuity contract, the earnings will be subject to ordinary income tax. While there’s no way to avoid paying those taxes, most insurance companies will allow you to defer a portion of the taxes by extending the payout period. In your case, since you took a lump sum payout, the insurance company will report the taxable income to you and the IRS and you’ll have to include it on your upcoming tax return. You might have had the option to take the payout in installments. In this case, each payment would be part non-taxable return of principal and part taxable income. However, this approach could allow you to spread out the tax impact over several years. Yours is a question best asked before you take receipt of the money. If spreading taxes out over multiple years is appealing, check with the insurance company and see if you can undo your claim and start over. Good luck.