While deferred annuities provide both security and tax deferred interest accrual for millions of retired savers, the annuity owners cannot put-off taxation indefinitely. And while the income can be deferred, it unfortunately and eventually gets taxed at ordinary income rates. But the silver lining with deferred annuities is that the contract holder decides when to make withdrawals and when to pay the tax.
There are three circumstances in which one can gain tax relief when taking withdrawals from deferred annuities. The first scenario pertains to business owners that have an operating loss. As long as the business is not regarded as a passive activity, the loss can be used to cancel out other types of cash flow, such as investment income i.e. withdrawals from deferred annuities. For example, if the business owner realizes an operating loss of $20,000 in a given calendar year, then he can take a $20,000 deferred annuity distribution the same year and not need to pay any annuity taxes on that distribution.
An additional way to exempt your deferred annuities distribution via taxation is to designate a charity as the beneficiary of the contract. After you pass away, the charity will then receive the deferred annuity, with no income tax or even estate tax liability. Note that you never want to gift deferred annuities to charity as any change in ownership will cause the accumulated interest to be taxable to you, the owner.
A third way of avoiding taxes with deferred annuities is to use your proceeds to pay for long-term care bills (which hopefully you never have). Medical expenses that go over 7.5% of a taxpayer's adjusted gross income are deductible. The majority of long-term attention expenses can easily exceed that amount, often running well over $30,000 in a single year. Also by itself, that kind of large expenditure will qualify a taxpayer to be able to itemize, regardless of whether he or she can do so otherwise.
By way of example, a married couple filing jointly would have to have itemized deductions well over $10,300 in order to itemize deductions. But a $30,000 long-term attention bill will put taxpayers far over this level. If a couple hypothetically has an adjusted gross income of $32,500, 7.5% of that is $2,437.60. Therefore, all long-term care costs in excess of that amount, or even $27,562.50, would be deductible in schedule A of the 1040. So if they will took out $25,000 from their deferred annuity, their large deductions would offset any tax due.
The general idea is tat you want to take money from deferred annuities in any year when you have an offsetting deduction on your tax return. Or, take money from deferred annuities in any year when your income is low and you are in a low tax bracket.
If you are searching for ways to reduce tax from your deferred annuities distributions, a little information can save a lot of annuity tax.