Question

During the payout period of an annuity, the interest portion of the payment is?

A) taxed at the applicable capital gains tax rate.
B) taxed as ordinary income.
C) not taxed unless the recipient is over 59 1/2 years old.
D) taxed at one half of the applicable capital gains tax rae.

Answer 1

The interest portion of the annuity payment during the payout period is taxed as ordinary income. The correct option is B.

Step-by-step explanation:

During the payout period of an annuity, the interest portion of the payment is taxed as ordinary income. This is because the U.S. income tax system charges taxes on the nominal interest received in dollar terms, without adjustment for inflation.

This applies to various retirement and investment vehicles, like 401(k)s and traditional IRAs, where taxes are deferred until funds are withdrawn. Regardless of whether the receiver of the annuity payments is over or under 59 1/2 years old, the interest is taxed as ordinary income, and not at the capital gains tax rate or a reduced rate.