There’s a good chance that some (or all) of the income you receive from any annuity you own is taxable.
If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. For instance, if you purchased an annuity with $100,000 and in 10 years it is worth $190,000, you would only pay tax on the $90,000 of interest earned. The insurance company that sold you the annuity is required to tell you what is taxable.
Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income. In addition, be aware that you’ll have to pay any taxes that you owe on the annuity at your ordinary income-tax rate, not the preferable capital gains rate.
