Question

What accounting method is used for the taxation of variable annuities?

A) FIFO
B) LIFO
C) Specific Identification
D) None of the above

Answer 1

Taxation of variable annuities does not use FIFO, LIFO, or Specific Identification but follows annuity tax rules, taxing withdrawals on an income-first basis as ordinary income.(Option D).

Step-by-step explanation:

The accounting method used for the taxation of variable annuities is None of the above.

Variable annuities are taxed under the annuity tax rules which are distinct from FIFO (First-In-First-Out), LIFO (Last-In-First-Out), or Specific Identification methods typically used for inventory accounting.

Under these annuity tax rules, withdrawals from a variable annuity are taxed on an income-first basis, meaning that earnings are distributed and taxed as ordinary income before any principal (non-taxable return of investment) is returned to the annuitant.