Final answer:
The proceeds from an annuity received by a beneficiary after the annuity owner's death are typically taxable as ordinary income. The taxation of these proceeds depends on whether the annuity was a qualified or non-qualified plan. In most cases, only the earnings portion of a non-qualified annuity is taxed.
Step-by-step explanation:
The question involves understanding how the proceeds from an annuity are taxed when they are transferred to a beneficiary after the owner's death. In general, when Mathew purchased an annuity, he entered a contract with an insurance company to provide a steady income stream for retirement, either for a fixed period or for his lifetime, with Cher, his wife, named as the beneficiary.
Upon Mathew's death, the proceeds given to Cher would typically be taxed as ordinary income. This means that Cher would be responsible for paying taxes on the annuity payouts at her regular income tax rate. It's important to note, however, that the specifics can vary depending on whether the annuity was a qualified plan, like a 401(k), or a non-qualified plan. Qualified plans have contributions that are made with pre-tax dollars and thus, all withdrawals or benefits received are fully taxable. Non-qualified plans are funded with after-tax dollars, which means only the earnings portion of the payout is taxed.
The answer to the question, therefore, is b) Taxable as ordinary income, because typically annuity proceeds received by a beneficiary after the owner's death are subject to taxation at the beneficiary's income tax rate. Different annuity carriers and contract terms could have nuances that would potentially impact the tax treatment, but the general rule is that these proceeds are taxable as ordinary income and not as capital gains.