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doucar

Tax deferred annuity

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My wife was the beneficiary of a friends tax deferred annuity. The friend died last year and she received the money.  Now, for federal income tax purposes, does she take the deceased's basis in the annuity, or does she get a stepped up to the date of death basis in the annuity?

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Annuities and pensions are taxed differently from other investments. Because they are tax advantaged investments prior to retirement, the rules ensure that the tax is captured later when distributions are made to the participant/beneficary of the plan. Thus, there is no step up in cost (basis) for an annuity. Rather, for the most part the beneficiary of an inherited annuity reports the income much the same way the original annuitant would have reported it had he or she received it. You'll find this explained in more detail in IRS publication 575 starting on page 37.

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