General information only. Not tax, legal or investment advice. A planning idea named here is not a recommendation for any person. Prem Tax and Accounting Corp is a CPA firm, not a law firm. Tax rules change often and figures are for the tax year shown: confirm with the official source or a qualified adviser before you act. Read the full notice. Book a 10-minute call.

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Annuities: how they are taxed, exchanged and weighed

An annuity is a contract with an insurance company. These guides explain the tax side in plain English, with Illinois notes. General information only, never a recommendation to buy, keep or swap one.

Prepared by Prem Tax and Accounting Corp. Last reviewed November 6, 2026. Figures as of November 6, 2026.

An annuity is a contract in which you pay an insurance company and it pays you income now or later. Our three guides explain how deferred annuities are taxed, how a section 1035 exchange works and what to watch for. We are a CPA firm and sell no insurance or investment products, and nothing here is advice for any person to buy, keep or swap an annuity.

The tax rules: how annuity income is taxed, including withdrawals, the 10 percent early tax, payouts and Illinois.
Choices and swaps: annuity types and 1035 exchanges.
Fine print: cautions, fees and the 3.8 percent NIIT.

How annuity growth and payouts are taxed, in plain English

How a deferred annuity is taxed: gain comes out first, a 10 percent tax can apply before 59 1/2, and payouts use an exclusion ratio. Illinois and QLACs too.

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Fixed, indexed and variable annuities, and how a 1035 exchange works

Fixed, indexed, RILA and variable annuities compared, and how a section 1035 exchange moves money between contracts without recognizing gain. As of 2026.

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Annuity fine print: costs, limits and the surprise tax

Surrender charges, fees, Illinois guaranty limits, sales rules, no basis step-up for heirs, and how the 3.8 percent NIIT reaches annuity gains.

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Settled law: sections 72, 1035 and 1411 are in force, and the 2025 tax law did not change them. Still pending: the IRS has not published a 2027 limit for qualifying longevity annuity contracts (QLACs; $210,000 for 2025 and 2026), and final required minimum distribution rules from the July 2024 proposals have not been issued. For retirement basics see our retirement tax savings guide and tax questions.

Common questions

Is growth in a non-qualified annuity exempt from tax?

No. Growth is deferred, not exempt, and the gain is taxed as ordinary income when it comes out.

Do you sell annuities?

No. We explain the tax side and work with your financial adviser, insurance agent or attorney.

Official sources

Keep reading

Please read: general information only

This page gives general information and education about current federal and state tax topics, including recent legislation, planning ideas, retirement and annuity rules, and court decisions. It is not tax, legal, accounting, investment, insurance or other professional advice, and it is not a substitute for advice from a qualified CPA, attorney or other adviser who knows your facts. Reading it does not create a CPA-client or any other professional relationship with Prem Tax and Accounting Corp. Prem Tax and Accounting Corp is a CPA firm, not a law firm. It does not sell insurance or investment products, and it does not recommend, rate or sell any annuity, fund or other product. A planning idea, a strategy name or an example here is not a recommendation to take or avoid any action.

Tax rules, thresholds, rates and deadlines change often, and Congress, the IRS, the courts and the states change how they apply them. Guidance on recent legislation is still being issued. We checked the figures against the official sources named on the page on the date shown (last reviewed November 6, 2026), but we do not promise that this page is complete, current or free of errors, and we do not update it the moment a rule changes. Where the rules are unsettled or guidance is still pending we say so. Amounts for a future year are labelled planning figures until the IRS or another agency publishes them. Examples use invented numbers and are for illustration only.

To the fullest extent the law allows, Prem Tax and Accounting Corp and its owners and staff are not responsible for any loss or decision that results from using this page. Links to government and other websites are for convenience and we do not control them.

This content is copyrighted by Prem Tax and Accounting Corp. Copying it in bulk, scraping it, or using it to train artificial intelligence systems requires our written permission.

Questions about how the new tax law or your year-end moves apply to you? Keshav Agrawal is a U.S. CPA and a Chartered Accountant (CA) from India. We prepare U.S. and Illinois returns, plan with you, and work alongside your financial adviser, insurance agent or attorney. We sell no investment or insurance products. Book a 10-minute call or send us a message.

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