21 Apr Do I owe taxes on this inheritance?

Q. My dad passed away on Feb. 1, 2022, and I am receiving $4,000 from his annuity .I live in New Jersey but the annuity money is in Maryland. Do I have to pay any kind of tax on this? There was no beneficiary and I am the next of kin.
— Son

A. We’re sorry to hear about your dad.

Here’s what you need to know about inherited annuities.

For starters, an annuity is an insurance product, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said to get an annuity, you pay the insurance company a sum of money.

There are two types of annuities: a deferred annuity and an immediate annuity.

“In a deferred annuity you pay the insurance company the sum of money and the annuity grows tax-deferred,” he said. “In an immediate annuity, you pay the insurance company the sum of money and the insurance company pays you a lifetime payment, usually monthly.”

Because your dad paid the insurance company for the annuity, a portion of what the annuitant receives is a return of their own money, Kiely said.

You do not have to pay income tax on the return of your own principal. You only have to pay income tax on the income generated by the annuity, he said.

“On an investment, you pay income tax to the state in which you reside,” he said. “The fact that the annuity company is in Maryland is not relevant.”

In your case, it is unclear if you have to pay income tax on part or all of the $4,000 you received from your dad’s annuity. Contact the annuity company, which should be able to explain the nature of the payout.

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This story was originally published on April 21, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.