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State premium taxes are sales taxes assessed on insurance premiums. Because annuities are insurance products, they are regulated by the insurance commissions in each state. Much of that regulation is relatively uniform, but there are subtle differences. The most significant difference is the tax states levy on insurance premiums.
State premium taxes can be high, so if you’re considering buying an annuity, be aware of how the premium tax might affect the value of your annuity.
How States Tax Insurance Companies
With the exception of Illinois and Michigan, the states generally don’t tax insurance companies the same way they tax other businesses. The states tax other businesses on their corporate income. Insurance companies are taxed on the value of the premiums they write in a state.
It is important to understand that each state is free to tax every aspect of an insurance company’s premiums. That includes premiums they receive from the sale of annuities. The reason you need to be careful is that those taxes are almost always passed on to you when you buy an annuity.
When Are Premium Taxes Due?
You will pay state premium taxes at one of two points in time.
If you buy an immediate annuity, you will pay the premium tax up front. The tax won’t be added to your out-of-pocket premium payment. Instead, it will be deducted from the initial value of the annuity contract.
When someone buys a deferred annuity, the premium tax is collected during the annuitization, or payout, phase. The premium tax will be deducted from the first payment.
Which States Charge a Premium Tax?
Nearly all U.S. states and territories charge insurance companies a premium tax. But not all of them levy the tax on annuities. There are only a handful of states that charge a premium tax on annuities.
|State||Annuity Premium Tax||Notes|
|California||2.35%||Tax of 0.5% annuity premiums on qualified pension and profit-sharing plans.|
|Florida||1%||No tax annuity premiums paid by holders in the state if the tax savings are credited to the annuity holders.|
|Maine||2%||No tax on certain historical annuities, retirement annuities issued by certain nonprofit companies, or annuities issued in connection with deferred compensation plans or certain retirement accounts qualified or exempt under federal law.|
|Nevada||3.50%||No tax on annuities issued in connection with the funding of a pension, annuity or profit -sharing plan qualified or exempt pursuant to federal law.|
|South Dakota||1.25%||1.25% for first $500,000. 0.08% for everything above $500,000.|
|Wyoming||1%||No tax annuities issued in connection with pension annuity or profit-sharing plan exempt or qualified under federal law.|
Importantly, many of the states that do charge a premium tax on annuities waive it when they are purchased inside a qualified plan, such as an IRA, 401(k) or other type of employer-sponsored retirement plan.
What Kind of Planning Can Be Done to Avoid a Premium Tax?
For many people considering an annuity, avoiding the premium tax is simple. Most states don’t charge it on annuities. For consumers living in one of the seven states that charge the tax, there are a couple of planning considerations available.
Those already preparing to move to a state that doesn’t charge the tax should hold off buying an annuity until after the move is completed.
Those who have a residence in two different states — where one is a high-tax state and the other is a low- or no-tax state — should seek the advice of their financial and legal advisors to determine if purchasing an annuity when living in the home in the low-tax state is possible.
Other Factors Related to State Insurance Regulations
Taxation is not the only aspect of annuities that the states regulate. Rates, features and benefits can all vary widely based on the rules and individual tax codes of each state.
The individual states determine which features of a product they will approve for sale. Some states regulate how and to whom an annuity may be sold. Others regulate the types of riders available for purchase.
States may also treat the various types of annuities differently. All annuities are insurance products, but some annuities are also regarded by states as securities.
Under federal law variable annuities are categorized as securities, regulated by the U.S. Securities and Exchange Commission. Fixed annuities, on the other hand, are not securities and are not regulated by the SEC. And although most indexed annuities are not registered with the SEC, an indexed annuity may or may not be a security.
Regardless of the state in which your annuity is issued, it makes sense to consult with a financial advisor to determine which type of annuity is appropriate for you.
6 Cited Research Articles
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- American Council of Life Insurers. (n.d.). Annuities and Consumer Protections. Retrieved from https://www.acli.com/Consumer-Info/Annuities/Annuities-and-Consumer-Protections
- American Council on Gift Annuities. (n.d.). State Regulations. Retrieved from https://www.acga-web.org/state-regulations
- Insurance Information Institute. (2019). State taxes. Retrieved from https://www.iii.org/publications/a-firm-foundation-how-insurance-supports-the-economy/a-50-state-commitment/state-taxes
- Grace M. et al. (2007). Insurance Premium Taxes. Retrieved from https://www.ntanet.org/wp-content/uploads/proceedings/2007/006-grace-insurance-premium-taxes-2007-nta-proceedings.pdf
- Todd, M.B. & Cook, P.E. (2017, December). Retaliation: A Guide to State Retaliatory Taxes, Fees, Deposits and Other Requirements. Retrieved from https://www.naic.org/documents/prod_serv_legal_ret_zu.pdf
- U.S. Securities and Exchange Commission. (n.d.). Annuities. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities