Secondary Market Annuities are tax free awards to the original annuitant, per IRS regulations. As tax free income streams to the original annuitant, the annuity issuers making the payments do not issue 1099’s to the recipients or to subsequent assignees. That said, while you will not receive a 1099 for the income you receive, this does not mean it’s tax-free.
Federal law and IRS guidelines outline how, in a properly structured transaction, a court order shows the new purchaser as the assignee of an existing payment stream by means of qualified order. This is the court process we follow on all cases. Each state has its own transfer statutes but they are designed to comply with IRS Section 5891 rules and these are what we follow on all transactions.
Secondary Market Annuity Taxation:
The taxation of income from these assigned structured settlement payments is determined by the taxpayer and their tax adviser. Please note, if the Secondary Market Annuity is in an IRA then all IRA distributions will be taxed when they are taken, so the rest of this page does not apply.
But for Secondary Market Annuities acquired with non-qualified funds, annuity income is considered ordinary income. Typically, the income vs principal is calculated using either an exclusion ratio to determine (exclude) from income that amount of each payment that is return of principal, or by using the amortization schedule.
How To Calculate Using The Exclusion Ratio:
The exclusion ratio works like this: say you paid $100,000 and will receive $200,000 over 100 payments of $2000 each. Exactly 50% of each payment would be income, and 50% is return of principal. Consult your adviser, but generally, this income is “ordinary income” for IRS purposes.
The exclusion ratio therefore is 50%- 1/2 of each payment is taxable income. This Article explains it well, but consult your tax adviser for specific questions.
To be fair, there may be alternative ways to reflect the principal and interest in your payment stream by using an amortization schedule, which can be downloaded from the inventory page and will be provided with your closing book.
This method treats the payment stream in the same manner you would treat a loan or other receivable, where you are the lender, and recognizes interest income predominately in early years, and principal in latter years. This may or may not be beneficial for you.
At this time, it’s our understanding you can use either the amortization method, or the exclusion ratio method, to calculate your taxes. But be sure to consult your own tax adviser.
Summary Of Taxes And Secondary Market Annuities:
So even though will not be receiving a 1099 for the payments from the carriers based on current tax law, what happens in the future to tax law is anyone’s guess. Some now use an amortization schedule to allocate principal and interest, while others use the exclusion ratio.
SecondaryMarketAnnuity.Net and Annuity Straight Talk, LLC do not offer tax advice, and this page is for general information only, so please be sure to consult your own tax adviser for more info.