539 / How is a temporary life annuity taxed?

A temporary life annuity is one that provides for fixed payments until the death of the annuitant or until the expiration of a specified number of years, whichever occurs earlier. The basic annuity rule ( Q 527) applies. That is, the investment in the contract is divided by the expected return under the contract to find the portion of each payment that can be excluded from gross income (the exclusion ratio). Expected return is determined by multiplying one year’s annuity payments by the multiple in Table IV or Table VIII of the IRS Annuity Tables for the annuitant’s age (as of the annuity starting date) and sex (if applicable) and the whole number of years in the specified period.¹ Tables IV and VIII can be found in Treasury Regulation Section 1.72-9.

The penalty tax of IRC Section 72(q) may be imposed on the taxable portion of payments received under the contract unless one of the exceptions listed in Q 523 is met.

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1.     Treas. Reg. § 1.72-5(a)(3).

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