Final answer:
In a life term annuity, ordinary taxes on the income are typically paid when the funds are withdrawn or distributed. Factors such as the type of annuity, the annuitant's age, the duration of the annuity, and local tax laws can affect the tax treatment.
Step-by-step explanation:
In a life term annuity, ordinary taxes on the income are typically paid when the funds are withdrawn or distributed. The taxation is based on the portion of the withdrawal that represents earnings or interest, known as the taxable portion. The tax is calculated at the individual's ordinary income tax rate for the year of withdrawal.
For example, let's say an individual has a life term annuity and decides to withdraw $10,000 in one year. If the taxable portion of the withdrawal is $7,000, and the individual's ordinary income tax rate is 25%, then the tax owed on the withdrawal would be $7,000 multiplied by 0.25, equal to $1,750.
It's important to note that the tax treatment of life term annuities can vary depending on factors such as the type of annuity, the annuitant's age, the duration of the annuity, and local tax laws. Consultation with a tax professional is recommended for accurate information.