Inherited Annuity Tax Calculator: Federal Tax on Each Payout Choice (2026)
The Memorial Merits Inherited Annuity Tax Calculator is a free tool that shows how much of an inherited annuity is taxable and the federal income tax on each payout choice: a lump sum, a 5-year payout, a 10-year payout or lifetime payments. It uses 2026 IRS tax brackets, works out the deadline date that applies to you, and needs no sign-up. You owe ordinary income tax on the earnings, not on the original principal, and an inherited annuity does not get the step-up in basis that inherited stocks do, because untaxed annuity growth is treated as income in respect of a decedent under Internal Revenue Code section 1014(c).
The calculator works in two parts. Part 1 asks for the annuity type, the value and your income, and shows the taxable amount and the tax on a lump sum. Part 2 asks who you are to the owner and when they passed, then compares the tax on every payout choice the IRS allows you and lists your deadline dates. You can print the result as a Report and Call Sheet or email it to yourself. It estimates federal income tax only. State tax and the exact options in your contract are what a licensed specialist confirms, free.
An inherited annuity is taxed as ordinary income at your own federal bracket, not at a special annuity rate. On a non-qualified annuity only the growth is taxable and the original principal comes back to you tax-free. On a qualified annuity the whole withdrawal is taxable, because none of it was taxed going in.
- There is no step-up in basis on an inherited annuity, which is the rule that surprises people who have inherited a house or a brokerage account before.
- Which type you inherited decides almost everything, so it is the first thing the calculator asks and the first thing a licensed specialist verifies.
- How you take the money changes the total tax more than any other choice you make: a lump sum reports every taxable dollar in one year and can push you into a higher bracket.
- The withdrawal window is usually the 5-year rule for a non-spouse beneficiary when the owner passed before income began, and the SECURE Act 10-year rule on a qualified annuity.
- The IRS sets out the treatment in Publication 575, and this page’s calculator applies that logic to your numbers using 2026 IRS tax brackets.
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<script src="https://memorialmerits.com/api/tools/annuity-lite.js" async></script>How to Use the Inherited Annuity Tax Calculator
The calculator takes about two minutes and asks five questions in two parts. The video shows every step with a $100,000 example, and the numbered steps below match the buttons on the screen.
Video: how to use the Inherited Annuity Tax Calculator (1 minute 45 seconds)
Read the video transcript
This is the free Memorial Merits Inherited Annuity Tax Calculator. It shows the federal tax on each way you can take an inherited annuity, and the deadline that applies to you.
Part 1 has three questions. Choose the type of annuity. Enter its value and the amount the owner paid in. Then enter your yearly income and your tax filing status.
In this example, $40,000 of the $100,000 is taxable. The federal tax on a lump sum is $8,650.
Part 2 has two questions: who is named as the beneficiary, and when the owner passed away.
“Compare payouts” shows the federal tax on each choice. Here, lifetime payments have the lowest total tax, $4,800, and keep about $3,850 more than a lump sum.
“Your deadline” lists the dates that apply to you. In this example, lifetime payments must start within one year of the death.
The checklist lists each step to claim the annuity. “Free help” explains what a free call with a licensed annuity specialist checks before you send the claim form.
Print your Report and Call Sheet, get it by email, or copy a link to your estimate. Take the report with you to the call.
If you run a website, you can add this calculator to your site for free by copying one block of code.
Use the free Inherited Annuity Tax Calculator at memorialmerits.com.
- Start the calculatorClick Calculate My Inherited Annuity Tax. The first question opens.
- Choose the annuity typeChoose Non-qualified, Qualified or I am not sure. The annuity statement or the insurance company can tell you which type it is.
- Enter the two amountsEnter the Current value of the annuity and the Amount the owner paid in, then click Next.
- Enter your incomeEnter your Yearly income, choose Single or Married filing jointly, then click See My Tax. The calculator shows the taxable amount, the tax-free amount and the federal tax on a lump sum.
- Start Part 2Click Continue to Part 2: Options and Deadlines, then choose who is named as the beneficiary: a surviving spouse, a child, relative or other person, the estate, or a trust.
- Enter the date and your ageChoose the Month and Year the owner passed away, enter Your age today, then click Show My Options. Your results open in four tabs.
- Compare the payout choicesOpen Compare payouts. It shows the total federal tax, the tax in year one and the amount you keep for each payout choice, and marks the choice with the lowest total tax.
- Check your deadlineOpen Your deadline. It lists each date that applies to you and the number of days left.
- Use the claim checklistOpen Checklist and tick each step as you finish it. Your ticks stay on your device.
- Read the free help tabOpen Free help. It lists what a free call with a licensed annuity specialist checks before you send the claim form.
- Save your reportClick Print My Report and Call Sheet, or enter your email address and click Email My Report and Call Sheet, or click Copy a Link to My Estimate.
How to Calculate the Tax on an Inherited Annuity
To estimate the tax on an inherited annuity yourself, you work it in three steps. The calculator above does this for you, but here is the logic behind it.
- Find the taxable earnings. For a non-qualified annuity (bought with money that was already taxed), subtract the original principal from the total value. The difference is the taxable earnings, and the principal comes back to you tax-free. For a qualified annuity (funded with pre-tax money inside an IRA or a workplace retirement plan), the entire amount is taxable, because none of it was taxed going in.
- Apply your income tax rate. The taxable portion is taxed as ordinary income at your federal tax bracket, not at a special annuity rate, and there is no step-up in basis. The IRS explains this in Publication 575.
- Choose how you take it. A lump sum reports all of the taxable earnings in a single year, which can push you into a higher bracket. Spreading the withdrawals across the allowed window usually spreads the tax with them. This timing is the part you control, and it changes the total tax more than anything else.
Qualified vs Non-Qualified: The Split That Sets Your Taxable Amount
The single biggest factor in your number is which type you inherited. A non-qualified annuity is taxed only on its growth, so most of a return-of-principal payout is tax-free. A qualified annuity is fully taxable as you draw it down. Confirming the type is the first thing the calculator asks, and the first thing a licensed specialist verifies, because it changes the math entirely. The Memorial Merits inherited annuity guide covers the distribution deadlines, the 5-year and 10-year rules, and the spouse versus non-spouse options in depth.
| What to compare | Non-Qualified Annuity | Qualified Annuity |
|---|---|---|
| How it was funded | With money that was already taxed (outside a retirement account). | With pre-tax money inside an IRA or a workplace retirement plan. |
| What is taxable to you | Only the earnings. The original principal returns to you tax-free. | The entire amount you withdraw, because none of it was taxed going in. |
| Tax rate that applies | Ordinary income tax on the earnings at your federal bracket. | Ordinary income tax on the full withdrawal at your federal bracket. |
| Step-up in basis | No. The growth is always taxable. | No. The full balance remains taxable on withdrawal. |
| Common withdrawal window | Often the 5-year rule for non-spouse beneficiaries when the owner passed before income began. | Usually the SECURE Act 10-year rule for most non-spouse beneficiaries. |
General information based on IRS Publication 575 and Publication 590-B. Not tax advice. A licensed specialist confirms how the rules apply to your situation.
How the Calculator Splits a Payment Into Taxable and Tax-Free
Two people can inherit the same non-qualified annuity, with the same total value and the same original principal, and owe different amounts of tax in the first year. The difference is not the contract. It is how the money comes out.
Withdrawals Before Payments Start: Earnings Come Out First
If you take a lump sum, or pull money out in pieces without turning the contract into a payment stream, the earnings come out before the principal does. Internal Revenue Code section 72(e)(2)(B) states it directly: an amount received before the annuity starting date is included in gross income to the extent it is allocable to income on the contract, and excluded to the extent it is allocable to the investment in the contract.
In practice that means the taxable part is front-loaded. On a contract holding 60,000 dollars of original principal and 40,000 dollars of growth, the first 40,000 dollars you touch is fully taxable. Only after that does the tax-free principal start coming back to you.
Annuitized Payments: How the Exclusion Ratio Sets the Taxable Portion
Turn the contract into a stream of payments instead and the split changes completely. Section 72(b)(1) sets it with the exclusion ratio: the investment in the contract divided by the expected return under the contract. That single ratio fixes the percentage of every payment that arrives tax-free, and the remainder is ordinary income.
One limit catches people years into a stream they thought they understood. Under section 72(b)(2), the tax-free part of any payment cannot exceed what is left of the unrecovered investment in the contract. Once the full original principal has come back to you, the exclusion stops. Every payment after that point is fully taxable, on a contract that felt lightly taxed for years.
| Original principal, the investment in the contract: 60,000 dollars. Current value: 100,000 dollars. Taxable earnings: 40,000 dollars. The 60,000 dollars was already taxed once, so it returns to you tax-free. Only the 40,000 dollars of growth is in play. Lump sum, taken in one year All 40,000 dollars of earnings lands on a single year’s return as ordinary income. For a single filer with 65,000 dollars of other income, the 2026 federal tax on it is 8,650 dollars, because stacking 40,000 dollars on top of that income pushes the upper slice from the 12 percent bracket into the 22 percent bracket. Spread across five years, 20,000 dollars a year Earnings still come out first, so years one and two carry the full 40,000 dollars of taxable income and years three through five return principal tax-free. The same earnings are taxed, split across two returns instead of one: 8,500 dollars in total for the same filer, 4,250 dollars in each of the first two years. Annuitized, with a 150,000 dollar expected return The exclusion ratio is 60,000 divided by 150,000, which is 40 percent. Forty percent of every payment arrives tax-free and sixty percent is ordinary income, and that split holds until the whole 60,000 dollars of principal has been recovered. After that, every payment is fully taxable. The lump sum and five-year figures use 2026 IRS tax brackets and the standard deduction for a single filer with 65,000 dollars of other income. The annuitized line uses an illustrative expected return. Your real number depends on your total income, your filing status, and your state. The rules behind the arithmetic are in IRS Publication 575 and Internal Revenue Code section 72. This is general information, not tax advice. |
How Much Tax on a $100,000 Inherited Annuity? Example by Payout Choice
These are the calculator’s own results for one beneficiary: a 50-year-old single filer with 65,000 dollars of other income, whose parent passed in June 2026. The same 100,000 dollar contract is shown twice, once as a non-qualified annuity with 60,000 dollars paid in, and once as a qualified annuity where every dollar is taxable.
| Payout choice | Total federal tax | Tax in year one | You keep |
|---|---|---|---|
| Non-qualified annuity: $60,000 paid in, $40,000 taxable | |||
| Lump sum now | $8,650 | $8,650 | $91,350 |
| 5-year payout | $8,500 | $4,250 | $91,500 |
| Lifetime payments (lowest total tax) | $4,800 | $137 | $95,200 |
| Qualified annuity: all $100,000 taxable | |||
| Lump sum now | $22,714 | $22,714 | $77,286 |
| 10-year payout (lowest total tax) | $20,500 | $2,050 | $79,500 |
Single filer, 65,000 dollars of other income, 2026 IRS tax brackets and the standard deduction, income assumed steady and no growth in the contract. Lifetime payments use the IRS Single Life Table. Federal income tax only. Run your own numbers in the calculator above.
Two patterns hold across almost every case. Taking the whole amount at once costs the most, because every taxable dollar lands in one tax year and climbs into a higher bracket. And the gap is largest on a qualified annuity, where nothing was taxed going in: here the lump sum costs 2,214 dollars more than spreading the money over ten years. The deadline to choose lifetime payments on a non-qualified annuity is one year after the death, which is why the calculator lists your dates next to the tax.
Why an Inherited Annuity Gets No Step-Up in Basis
Anyone who has inherited a house or a brokerage account has met the step-up rule. The asset’s basis resets to its value on the date of death, and the gain that built up during the owner’s lifetime is never taxed at all. People reasonably assume an annuity works the same way. It does not, and the reason is written into the code rather than left to interpretation.
Internal Revenue Code section 1014(c) says the step-up “shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.” An annuity’s untaxed growth is exactly that: income the original owner earned and never paid tax on. The obligation does not end at the death. It transfers to whoever receives the money.
This single rule moves a beneficiary’s number more than any other, and it is usually discovered after the withdrawal has already been made. The calculator on this page assumes no step-up, because there is none to assume.
The Estate Tax Deduction Most Beneficiaries Never Claim
There is a correction sitting on the other side of that rule, and it goes unclaimed constantly.
If the annuity belonged to an estate large enough to owe federal estate tax, the same dollars were taxed twice: once inside the estate, then again as ordinary income to you. Internal Revenue Code section 691(c) exists to fix that. It allows the person receiving income in respect of a decedent to take an itemized deduction for the federal estate tax attributable to that income. IRS Publication 559 sets out the computation under its Estate Tax Deduction section, including a subsection written specifically for surviving annuitants.
Two details are worth knowing before assuming it does not apply to you. The deduction follows the income, so a beneficiary taking the annuity across several years claims a portion in each year the income is reported. And Internal Revenue Code section 67(b)(7) carves the section 691(c) deduction out of the class of miscellaneous itemized deductions entirely, which is why it survives limits that erase other write-offs.
Most estates never owe federal estate tax, so most beneficiaries will not qualify. When it does apply it is worth real money, and no payout form from a carrier will ever raise it. Bring it to whoever prepares the return.
The Deadline the Calculator Assumed, and How to Check It
Your withdrawal window is set by the contract type, your relationship to the owner, and whether payments had already begun when the owner passed. Getting it wrong does more than change the tax. Missing the window can force the entire balance out in one year, which is the most expensive outcome available.
Non-qualified annuities run on Internal Revenue Code section 72(s):
- If the owner passed before payments began, the entire interest must be distributed within five years of the death. That is the default, and it is where most non-spouse beneficiaries land.
- Section 72(s)(2) offers a way out. If the money is payable to a designated beneficiary and is distributed over that person’s life or life expectancy, and those distributions begin no later than one year after the owner’s death, the five-year clock does not apply. The one-year start is the part that gets missed, because it runs while the paperwork is still moving.
- Section 72(s)(3) treats a surviving spouse as the holder of the contract, which generally means a spouse can continue it rather than empty it on a deadline.
Qualified annuities held inside an IRA or a workplace plan run on the SECURE Act ten-year rule instead. The IRS states in its required minimum distribution guidance that the ten-year rule applies whether the owner passed before, on, or after the required beginning date, and it names the beneficiaries who are exempt: a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person, and a person not more than ten years younger than the owner.
Read the contract, or call the carrier and ask which of these applies. It is the one input the calculator has to take on faith.
What This Calculator Can and Cannot Tell You
Plain and honest, so you know what you are getting:
- It can show the taxable amount of your inherited annuity, the federal income tax on each payout choice you are allowed using 2026 IRS tax brackets, the deadline dates that apply to you, and a checklist to claim the money, then give you all of it as a printable Report and Call Sheet.
- It cannot include state income tax, read the payout options written into your own contract, or stand in for tax advice. It also assumes your income stays the same each year and the annuity does not grow.
- The free next step is a no-pressure call with a licensed retirement income specialist who confirms your exact tax and your deadline, at no cost. If an annuity move is not right for you, they will say so.
For broader help with the money decisions that follow a loss, the Memorial Merits financial resources hub and estate planning guide are calm places to start.
Confirm Your Number With a Licensed Specialist, Free
An estimate tells you the taxable portion. A licensed retirement income specialist tells you the exact figure, the deadline that applies to your situation, and whether keeping, moving, or cashing out the annuity is the right call. The consultation below is free, with no obligation, and it is the same expert network the calculator points you to.
Inherited Annuity Calculator FAQ
| Where to Go Next An inherited annuity almost never arrives alone. It comes attached to a death certificate, a claim form, and a list of accounts nobody has looked at yet. These are the Memorial Merits guides that pick up where this calculator stops, each one matched to the situation that sends people here. If you want the full rules, not just the number Inherited Annuity: Your Options, Taxes and the Rules The long-form companion to this page. Spouse versus non-spouse, every payout option side by side, and what each one costs you in tax. If there is a life insurance policy too How to File a Life Insurance Claim After a Loved One Passes Away The other death benefit, and the one with the opposite tax answer. Life insurance proceeds usually arrive tax-free, which is exactly why people expect an annuity to behave the same way. If you are the one settling the estate How to Be an Executor: Step-by-Step From Appointment to Distribution A named beneficiary means the annuity passes outside the will. The rest of the estate does not, and the timeline for that runs on its own clock. If you are being told the estate has to go through probate Probate Guide: Costs, Forms, Timelines, and When You Can Skip It Which assets actually require it, what it costs in your state, and the situations where the whole process can be avoided. If a beneficiary receives disability benefits How to Protect a Special Needs Child’s Benefits From Family Inheritances An inheritance paid straight to someone on needs-based benefits can end those benefits. Read this before any money moves. If you are here planning ahead rather than settling something Legacy and Estate Planning Resources, With the Price You Actually Pay Every estate planning service Memorial Merits has vetted, what each one costs, and which one fits the size of the estate you are working with. |
| Memorial Merits last verified this calculator’s tax logic against IRS Publication 575 and Internal Revenue Code section 72 on September 13, 2026, and opened every source listed below on that date. Every tax rule, threshold and deadline on this page is cited to the government source that sets it, rather than to a summary of it. Each source below is listed with the specific thing it governs here, so you can check any single claim without reading the whole publication. IRS Publication 575, Pension and Annuity Income The base treatment of annuity income, the taxable and tax-free split, and the methods used to figure the taxable part of a payment. IRS Publication 590-B, Distributions from Individual Retirement Arrangements Distribution rules for qualified annuities held inside an IRA, including beneficiary withdrawal requirements. IRS Publication 559, Survivors, Executors, and Administrators Income in respect of a decedent, and the Estate Tax Deduction computation including the subsection for surviving annuitants. IRS Topic no. 410, Pensions and Annuities The short official summary of how pension and annuity income is reported and taxed. IRS, Retirement Plan and IRA Required Minimum Distributions FAQs The SECURE Act ten-year rule and the list of beneficiaries exempt from it. 26 U.S. Code section 72, Annuities The exclusion ratio at 72(b)(1), the unrecovered investment limit at 72(b)(2), the earnings-first rule at 72(e)(2)(B), and the distribution deadlines at 72(s). 26 U.S. Code section 1014, Basis of Property Acquired from a Decedent Subsection (c), which is the reason an inherited annuity receives no step-up in basis. 26 U.S. Code section 691, Recipients of Income in Respect of Decedents Subsection (c), the estate tax deduction available to a beneficiary when the estate paid federal estate tax on the same money. How this page is maintained. Memorial Merits is not a tax preparer, a law firm, or a financial advisor, and nothing here is tax advice. The calculator applies published IRS rules to the figures you enter. A licensed professional confirms how those rules land on your own return. |
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