Changeable annuity owners frequently hear a "excellent news, bad news" saga from their financial and tax experts. The excellent news may be that their investment went up in worth; the negative information is the fact that once they die, their beneficiaries may have to pay income tax on that development. There's, nevertheless, a way to get rid of the "not so great news" part of this story and pass much more bucks to your loved ones with tax planning.
Let us take the case of Sally, age seventy, a widow with 1 daughter. After her husband passed away, ten years ago, Sally sold her home and put in a part of the money in a variable annuity.
This was smart tax planning as she didn't need cash for living expenditures and simply needed to grow without generating additional annual income tax.
Sally's annuity has nearly doubled in value over the time she has owned it. However she has recently been advised that her daughter, who's in the 35% tax bracket, may ultimately have to pay income tax on those gains. Note that 1 aspect of tax planning for annuities is definitely to have a person in the lowest tax bracket pay the taxes.
Because Sally does not require income from her annuity at this time, 1 tax planning strategy could be to have her daughter purchase a life insurance coverage on Sally's life for the annuity's worth. This would allow the proceeds of the life coverage to move income tax free when Sally passes away.
To purchase the policy, Sally can annuitize her adjustable annuity. She will get a life time income and be able to offer her daughter sufficient cash to make the life insurance premium payments. Any of the distributions that Sally doesn't spend, might be spent to supply for her future demands.
You will find yet two additional tax planning benefits. At age 70, annuity distributions may have a fairly high exclusion percentage which means that almost all of each payment is a tax-free return of principal. Better yet is that Sally is living on a fairly modest income and it is in the 15% tax bracket. Consequently, by her harvesting the annuity, tax on the income will likely be paid at 15% instead than allowing the annuity to be inherited by her daughter who would require to pay tax at 35%.
Tax planning, the thinking ahead of ways to best handle the annuity to reduce taxes, may save significant tax bucks for the loved ones.
You Pay More Taxes Than NecessaryAnd we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
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