Life annuities are one of the most popular insurance contracts of our time. However, it is essential to know that this income is taxable most of the time and therefore requires a declaration. What is a life annuity? How is the tax rate calculated? How do I make my tax return?
Life Annuity: What Is It?
A life annuity is a sum of money paid periodically to a beneficiary until his death by a mutual insurance company. Its origins are multiple. On the one hand, it can result from the abandonment of financial or real estate capital; on the other hand; it can result from the amount supposed to repair a prejudice. The life annuity can also originate from a parent who would have guaranteed to pay it to a minor. In this case, the minor(s) will receive the life annuity until death.
It is also important to note that a life annuity may change at any time. This explains why reversionary clauses are usually included at the beginning of the contract. Thus, following the death of the first beneficiary, another person previously designated in the clause will become the annuity’s beneficiary. This type of situation is where reversions to a spouse are usually observed.
Life Annuity: How Is the Tax Rate Calculated?
Surprising as it may seem, it should be noted that life annuities are subject to taxation. In fact, the states consider it as income; therefore, the tax rates applied in the context of the income tax are valid in this case.
It is as if the tax authorities apply a tax on the inheritance. The tax rate decreases with age, from 70% for those under 50 to 50% for those between 50 and 69. Between the ages of 60 and 69, it drops by 10% and reaches a maximum of 40%.
It should also be noted that the rate of deduction is not the only variable taken into account in the calculation of the tax rate of an annuity. Indeed, the calculation also considers the social security deductions, which are generally around 17.2%. Finally, it is only 30% for subjects aged 70 and over.
It is also essential to know that some annuities are not taxable. This is called a free annuity. People generally use this type of annuity to improve the exterior space of a property. Better still, the free annuities resulting from the abandonment of a property are very interesting as the French legislation confers on the tenant the obligation to pay the housing tax.
In terms of free annuities, we can mention the annuities paid by an insurance company as part of the compensation for a loss or the annuities paid to orphans of a world war.
Life Annuity: How Do I File?
The process of declaring a life annuity requires the intervention of a notary. Although it is not the notary’s responsibility to prepare the administrative files leading to the declaration, his or her assistance will be invaluable when problems with the tax authorities arise later. It is important to note that a notary is more appropriate in this situation than a lawyer.
Indeed, it is the notary’s role to defend an individual’s property and prevent the latter from being dispossessed. He, therefore, does not have the same prerogatives as a lawyer. It is also essential to specify the source of the income. The emphasis here will be on whether or not it is of French origin. This detail is necessary as it allows French tax residents to be directly deducted by the paying organization.