Question

H has an annuity funded with after-tax contributions. So far, H has placed $10,000 into the policy and it is now worth $25,000. If H cashes out the annuity, what is H's cost basis?

Answer 1

The cost basis of H's annuity is the initial amount contributed, which is $10,000. This is the amount that was invested with after-tax dollars and will not be taxed upon withdrawal. The growth of the annuity to $25,000 does not affect the cost basis.

Step-by-step explanation:

The student's question involves determining the cost basis for an annuity that was funded with after-tax contributions. In this case, the cost basis is the amount of money that H originally put into the annuity, not its current value. Since H placed $10,000 into the policy, the cost basis is $10,000, regardless of its current growth to $25,000. If H cashes out the annuity, the taxable amount will be the difference between the current value and the cost basis, which is $15,000 ($25,000 - $10,000).