Many boomers are considering buying immediate annuities to provide a supplemental retirement income stream that is guaranteed to last for life, assuming that the insurance company remains solvent. Unfortunately for some annuity purchasers, taxation of annuity income is going to increase.
The original bill that passed the Senate and more recently the House included a new 2.9% tax on unearned income. The more recent reconciliation bill increased the new tax rate to 3.8%.
The new tax on unearned income will be imposed beginning in 2013. The 3.8% tax applies to investment income received by married couples filing a joint return (and surviving spouses) and having a taxable income of at least $250,000. The tax will also apply to married taxpayers filing separately with an income of $125,000, and to other single taxpayers with an income of $200,000.
The new tax will continue present law and will be applied only to income that is currently taxable. For annuities, that means only income that is above the owner’s cost basis. For a life annuity, this considers your life expectancy. (More information about taxation of annuity income.)
Although the annuity industry will work hard to get this tax repealed, I would plan on the tax being around when baby boomers retire.
If you have or are considering purchasing an annuity for retirement, keep this tax in mind when putting together your retirement income plan. If you are fortunate enough to have a six-figure taxable income when the annuity begins, you will pay the extra 3.8%.
More taxes are likely coming for retirees who plan and invest well and will have some wealth to show for it. Tax planning will be increasingly important for them.