Question

An investor buys a nonqualified deferred variable annuity and contributes $25,000. Ten years later, he surrenders it for $40,000. For federal income tax purposes, he should report(A)$15,000 ordinary income(B)$40,000 ordinary income(C)$15,000 long term capital gains

Answer 1

Answer: $15,000 ordinary income

Explanation: Tax is paid on the profit or the difference in the contributed amount and the cash surrendered. Tax isn't paid on the contributed amount or when the contributed amount hasn't been surrendered.

The interest is calculated as the difference between the cash surrendered and the amount contributed. The interest accrued is the taxable amount.

Therefore, $40,000 - $25,000 = $15,000

Interest = $15,000

Non-qualified variable annuity is being taxed as ordinary income under the federal income tax law.