How to Pay Ordinary Income Taxes on an Annuity

Annuities are purchased to pay an income stream either now or at a future point in time. When the annuity starts paying regular payments, it is referred to as an ordinary annuity. Any growth in the annuity is tax-deferred, but distributions are added to income. Not all distributions may be taxable, depending on whether the annuity was funded as a retirement savings account, such as an IRA or 403b plan, where contributions are tax-deducted. Paying the taxes on the distributions requires knowing how much is taxable and how much isn't.

• 1

  Obtain Form 1099-R for the payments received throughout the year on the annuity. This form is sent by the annuity administrator in January to both you and the Internal Revenue Service.

• 2

  Read through the form. Box 1 gives you the gross distribution amount. Box 2a gives you the taxable amount. If part of your distribution reflects after-tax contributions, the gross distribution will be higher than the taxable amount. If they are equal, then all contributions were pretax dollars and therefore taxable.

• 3

  Record the gross distribution from Box 1 on Line 16a, Form 1040. Record the taxable portion from Box 2a on Line 16b, Form 1040, adding the amount to gross income.

• 4

  Locate Box 4 of Form 1099-R to see if any taxes were withheld by the annuity administrator when sending you the distributions. You may have elected to have a net amount sent less federal taxes, reducing each payment, but paying the taxes along the way.

• 5

  Record taxes already paid reported in Box 4 on Line 61, Form 1040.

• 6

  Complete you tax return with all applicable income and deductions. Sign it and submit it to the IRS.