Question

What are the tax consequences for a taxpayer who dies before recovering his investment in an annuity contract?

a. One-half of the annuity payment is taxable on the taxpayer's final income tax return
b. The entire amount of the annuity received in the year of death is nontaxable on the taxpayer's final income tax return
c. The amount of the unrecovered investment is deducted on the taxpayer's final income tax return
d. The entire amount of the annuity received in the year of death is taxable on the taxpayer's final income tax return

Answer 1

The unrecovered investment in an annuity can be deducted from the taxpayer's final income tax return when the taxpayer dies before fully recovering the investment.

Step-by-step explanation:

When a taxpayer dies before fully recovering their investment in an annuity contract, the tax consequences are specific. Under current tax law, if the annuity owner dies before they have recovered their investment in the annuity, the excess of the amount invested over what was received tax-free is deductible on the deceased taxpayer's final income tax return. This means that answer option 'c' is correct: The amount of the unrecovered investment is deducted from the taxpayer's final income tax return.