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My wife just inherited $80k through two annuities (they were 20 year annuities and were set-up about 10 years ago). We elected to have a lump-sum distribution (the interest appeared to be only about 4% a year), filled out some form about tax witholdings, and they withheld taxes based on our normal filing status and exemptions. My question is this - what taxes will we owe on this annuity? 1) the whole 80k? at what rate? capital gains rate - 20%, or will it all be considered income which will be taxed at least 28% and likely higher based on our income, or 2) only the amount that was made in profit on the 80k, assume 25-50% (my guess), or on 20-40K of it, or 3) none of it, since it was an inheritance which is tax free up to 500k (or is that for estate taxes). To complicate the situation, her mom contributed to this teacher's association annuity which may have let her (mom) invest her money in this annuity tax-free at the time of investment. I really believe we probably owe on the whole 80K, which makes me kindof sick now, because it will likely be taxed at the income rate...
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