State Premium Tax
Since the mid-1800s, insurance companies in many states have been assessed a type of excise tax on the premium dollars they receive from their customers. This state levy on premiums is akin to a sales tax charged to the seller ("insurance company") but usually passed on to the buyer.
Think of it as similar to the federal communications taxes you pay on your phone bill. Verizon may owe that amount to Uncle Sam but you are reimbursing them.
When are state premium taxes due?
State premium taxes on annuities are usually applied at the time you purchase a new immediate annuity or when you annuitize an existing deferred annuity. The effect of the tax is that someone your age who paid the same dollar amount to the same insurance company but lived in one of the non-premium tax states, would receive a higher monthly income than you by the amount of the tax.
Interestingly, in Florida (see table), the major annuity companies tend to incorporate this tax in their pricing, perhaps due to competitive pressures from brokers and banks and the popularity of annuities in a largely retired population.
In the other six states, however, you'll see the premium tax rate broken out as a line item on a company illustration and the quotes will reflect the after-tax calculations.
The percent of tax owed is different by state and tax-status of your premium, i.e., whether it's qualified or non-qualified monies. Qualified money would be an IRA, 401k, 403b, or similar retirement plan. It’s important to know, that in four of the six states, there is no premium tax on annuities purchased with IRA or 401k monies.
| State Tax on Life Insurance and Annuity Premium As of January 1, 2023 | ||
|---|---|---|
| State of Residence | Tax Rate on Qualified Premium (e.g., IRA, 401k, 403b) | Tax Rate on Non-Qualified Premium (e.g., Savings) |
| CA - California | 0.50% | 2.35% |
| CO - Colorado | 0.00% | 2.00% |
| FL - Florida | 1.00% (tax is absorbed by the insurance co.) | 1.00% (tax is absorbed by the insurance co.) |
| ME - Maine | no premium tax on qualified monies | 2.00% |
| NV - Nevada | no premium tax on qualified monies | 3.50% |
| SD - South Dakota | no premium tax on qualified monies | 1.25% on first $500,000 |
| TX - Texas | 0.04% | 0.04% |
| WV - West Virginia | 1.00% | 1.00% |
| WY - Wyoming | no premium tax on qualified monies | 1.00% |
If applicable, the state premium tax, is deducted once from your premium in the year in which you buy the annuity (or convert your deferred annuity into an immediate annuity).
Also, similar to state sales taxes on clothes, appliances, or a car, if you buy an annuity in a non-tax state and move to a premium tax state, you are not charged the tax on your existing annuity.
Premium taxes are not related to federal income taxes or state income taxes, which are taxes owed on the interest you receive from your annuity.
How does the insurance company know to deduct the tax? Basically, the company relies on information you provide. If your application indicates it was signed in a premium tax state, then tax will automatically be deducted. So if you own legal residences in two states and one of the states did not charge a premium tax, you would be well-advised to consult a tax attorney to find out if it's advantageous to apply for your annuity when living in the non-tax state.
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Comments (33)
Jerry
2015-02-17 12:42:43
One question: do the immediate annuity quotes that I have received from you include the cost of the Premium Tax (2.35%) in California?
Hersh (ImmediateAnnuities.com)
2015-02-17 12:52:35
Hi Jerry,
Yes, the state of California charges insurance companies a 2.35% premium tax (i.e., "sales" tax) when a customer who is a resident of California buys an immediate annuity with after-tax money (so-called "non-qualified" funds). This tax drops to 0.50% when a California resident buys his immediate annuity using IRA or 401k money. A premium tax is also levied in 5 other states. For annuity buyers who live in one of the remaining 44 states, there is no premium tax charged.
How does the premium tax affect your quotes?
The immediate annuity quotes we sent you by email took your state of residence into account. So the answer to your question is "yes", the quotes we sent you are those after deducting the premium tax for a California resident. For your information, an annuity quote for someone your age in New Jersey, for example, would show a 2.35% higher monthly income than is available to you, as a California resident.
Regarding the administration of this premium tax-- since it's a point-of-sales levy, the insurance companies withhold the amount of the tax when they receive your application and premium ("investment"). The companies rely on the street address you write into your application to determine whether a premium tax should be deducted from the income or not.
-Hersh
Eric
2015-02-19 13:48:49
Does the state premium tax apply to a non-qualified deferred annuity, like an indexed annuity?
Hersh Stern (ImmediateAnnuities.com)
2015-02-19 15:06:36
Hi Eric-
Not exactly. I'll explain. State premium taxes (in the six states that charge this type of tax: CA, ME, NV, SD, WV, WY) generally apply to annuitized premiums. That means, if you were to buy an immediate annuity with new money or if you annuitized an existing deferred annuity, then the tax would be deducted from your premium.
However, even if you took regular monthly withdrawals from your deferred annuity, and even if you intended to take such withdrawals for the rest of your life, the premium tax would not be charged since you didn't annuitize your contract to receive those payment.
"Annuitization" has a very particular meaning. It happens when you irrevocably convert a lump sum or a deferred annuity account balance into an immediate annuity. Since you haven't irrevocably turned over the cash balance to the insurance company in exchange for the guaranteed payments, you haven't "annuitized" your contract.
While there is an advantage to not paying a state premium tax, keep in mind there is also an income tax benefit when you receive payments which are annuitized. I'm referring to the "exclusion ratio" treatment of each month's payment. Each installment is considered part principal and part interest. And you receive the principal portion tax free! (This does not apply with an IRA annuity.)
When you withdraw income from a deferred annuity, however, your payment is fully taxable to the extent it is considered all gains or all interest. This continues until you've removed all the gains or interest. So there may be an income tax advantage to annuitizing your contract.
-Hersh
Jeff
2015-07-10 11:14:11
Very interesting. How would this tax then typically be addressed on one's personal state tax return (for those states that have state tax), not as income tax but as sales tax paid? Big difference but it seems to be really a reduction of income in that first year.
Hersh Stern (ImmediateAnnuities.com)
2015-07-10 16:34:19
Hello Jeff,
I've never heard of a premium tax expense being claimed on someone's state income tax return. But, best to check with a local CPA.
It's important to know that this special category of tax called a premium tax reduces the total amount of money available to the insurance company to invest on your behalf. It's not just a first year tax. It's as if the insurance company received less money from you than the amount you gave it. That's because the insurance company remits the amount of the tax to your state's treasury. So, in essence, the insurance company keeps less money than your initial premium.
Here's an example of how it might work. Let's say you live in Maine with a 2% tax. You give an insurance company $100,000 to purchase an immediate annuity. If you lived in New Jersey your $100,000 would buy you a $500 a month annuity for life. Because you live in Maine your $100,000 buys you 2% less income a month -- $490 -- for life. So it's not just a reduction in your first year's income. It's a reduction in your lifetime income by 2%.
Hersh
Natasha
2015-11-04 15:57:29
I own a fixed interest deferred annuity. I think there was no premium taxes deducted when I paid the premium and there haven't been taxes during the deferral accumulation period. Is the premium tax only applied IF I annuitize into an immediate annuity ?
Hersh Stern (ImmediateAnnuities.com)
2015-11-04 15:58:38
Hi Natasha-
Yes, state premium taxes are due only upon annuitization and not at purchase or during the accumulation phase of a fixed interest deferred annuity.
A general note unrelated to your question but good to mention to the public who are reading this blog - The above answer applied only to a fixed interest deferred annuity, sometimes called a MYGA (for Multi-Year Guaranteed Annuity).
FYI -- There is a type of deferred annuity called a Longevity Annuity or Deferred INCOME Annuity ("DIA") for which state premium taxes ARE removed at the time of purchase, because a DIA is considered to be an ANNUITIZED contract similar to an immediate annuity, even though the money "accumulates""," so to speak, for years before income is paid out.
Hersh
Dave
2016-02-09 16:15:20
Do the annuity quotes on your website factor in state premium taxes? it seems they do not, based on my understanding that the tax rates vary by state.
Hersh Stern (ImmediateAnnuities.com)
2016-02-09 16:16:10
Hi Dave,
You are partially right. The annuity calculator on the home page only asks for age, gender, amount to invest, and income start date. So when you enter just those four pieces of data, the quotes on the next screen do NOT take state of residence and, therefore, premium taxes, into account. We label the quotes on that page as estimates. (By the way, the state we assume for those estimates is New Jersey where we are located.)
However, if you continue on that 2nd screen you'll see where to enter your name, email, and state of residence. If you do that, the quotes you get on the 3rd page are exact and accurate and DO take premium taxes into account.
Hersh
Milt
2018-11-21 12:13:45
I have a non-qualified contract that I am considering annuitizing. It has increased in value quite substantially since I bought it in 2009. I live in California, and the annuity benefit illustration includes a premium tax of 2.35% of the accumulated value. Should the premium tax be applied to the original investment in 2009 (the premium) or to the value of the contract in 2018?
Hersh Stern (ImmediateAnnuities.com)
2018-11-21 12:14:37
It's always best to speak with a tax adviser about any tax questions. However, unfortunately, I believe the 2.35% state premium tax will be applied to the full 2018 accumulation value.
-Hersh
Joel
2019-05-15 10:51:14
About to Annuitize, bought it in New Jersey 12 years ago. I'm now retired in Florida. Is there a premium tax that is either paid by me or deducted from my monthly payment?
Hersh Stern (ImmediateAnnuities.com)
2019-05-15 10:51:49
Hi Joel,
Florida charges a 1.00% premium tax. However, the cost is absorbed by the insurance company. There is no cost paid by the buyer.
-Hersh
roger s.
2021-09-14 22:27:32
Has Colorado recently joined this group of states that charge a premium tax?
Kyle (ImmediateAnnuities.com)
2022-01-28 13:57:48
Hi Roger,
Yes, you are correct. Colorado recently began charging a premium tax of 2.00% on non-qualified (cash) annuity purchases. Colorado does not charge a premium tax on qualified (Traditional IRA, Roth IRA etc.) annuity purchases.
Harry D.
2022-10-04 19:13:45
Are Roth IRAs and Roth 401(k) accounts considered qualified plans for purposes of determining the rates of state premium taxes?
Kyle
2022-10-05 08:36:24
Hi Harry,
Yes. Both of those account types would be considered "qualified" for premium-tax purposes.
- Kyle
Lawrence M.
2023-05-28 11:04:20
I read that Nevada only charges the 3.5% on non- qualified contracts, if the payout includes a life option. It seemed to say that term certain payouts were exempt. Anybody know for sure?
Kyle
2023-05-30 12:08:06
Hi Lawrence,
Thank you for reaching out!
This is actually incorrect. The Nevada state premium tax of 3.50% would still apply to period certain (term certain) payouts. It applies to all "annuitized" options, which would include single premium immediate annuities (SPIAs) and deferred income annuities (DIAs). It would not apply to deferred annuities like MYGAs or indexed annuities.
Please give me a call at (800) 872-6684 if you have additional questions.
Best regards,
Kyle
Tatiana
2023-10-23 20:19:51
In what states premium tax on deferred annuity must be paid at issue vs at the time of annuitization?
Kyle
2023-10-24 16:38:00
Hi Tatiana,
Generally, state premium taxes are only charged on annuitized contracts, not deferred annuities. However, when Colorado enacted their state premium tax a couple of years ago, some insurance companies began charging the premium tax even on deferred annuity purchases.
At this point, Colorado is the only state we've seen do this. Not all insurance companies are charging the Colorado premium tax on deferred annuity purchases, so it is important to check with the insurance company before applying for your annuity (if you reside in Colorado).
Best regards,
Kyle
Tatiana
2023-10-24 16:59:17
Kyle, appreciate your reply! Not sure how reliable the website annuity.org is but based on their publication, SD and WV are the two states who impose premium tax at the time premium is paid rather than at the time when a policy is annuitized. But I've seen other information in different sources. Not sure why they make it so difficult for a consumer to find information :(
Ryan
2023-12-07 14:59:36
I'm still a bit confused on the Colorado Premium Tax 2%. If I'm 65, I have a N/Q Variable Annuity with Lincoln. I'm considering 1035 exchanging it to NYL's Lifetime Income Annuity with Income to begin immediately. Will I get this 2% Premium Tax?
Kyle
2023-12-13 14:12:18
Hi Ryan,
Thank you for reaching out!
In this scenario, the Colorado 2% state premium tax would apply. Essentially, whatever amount New York Life receives from Lincoln, they have to send 2% to Colorado. This results in you receiving a slightly lower quote in Colorado than you would in states without a premium tax. The good news is that any quote you receive will have already factored in the 2% state premium tax, so there would be no further reductions.
Please feel free to reach out with any other questions or concerns. We'll be very happy to help.
Best regards,
Kyle
Joseph B M.
2024-01-13 16:13:34
My friend bought a variable non-qualified annuity while a legal resident of Indiana in 1994. Upon retirement In 2000 he moved to Nevada. In February of 2024 he is annuitizing the non-qualified annuity with a life annuity with cash refund. He thinks he does not have to pay the Nevada 3.5% premium tax since it was purchased in Indiana prior to his moving to Nevada. Is he correct?.
Kyle
2024-01-16 10:24:39
Hi Joseph,
Thank you for reaching out.
In this case, I believe that the Nevada state premium tax will be assessed because he's annuitizing while living in Nevada. I would recommend that he check with his existing insurance company to see if they are applying the tax. If they are, he might also see it listed on the annuitization quotes he's receiving.
Best regards,
Kyle
Taylor
2024-01-17 01:05:20
I am in the process of buying a 5 year fixed rate annuity. I am doing this to have the annuity serve me like a CD but with a higher interest rate. Two questions: Will I be able to get a one time lump sum payment from the insurance company at the end of 5 years and, if so, will they deduct 2.35% from that payment (I live in CA)? The gentleman I am working has not mentioned the premium tax thus far.
Kyle
2024-01-18 11:57:59
Hi Taylor,
The 2.35% California state premium tax should only apply if you "annuitize" your fixed annuity. It should not apply if you cash it out (surrender) at the end of term.
Best regards,
Kyle
Sumi R.
2024-03-19 21:46:53
So rest of the states have higher premium taxes?
Could you share the NY, NJ excise tax and other taxes levied?
Kyle
2024-03-20 15:17:34
Hi Sumi,
Thank you for reaching out.
The states not listed do not have any state premium taxes. There are no special taxes due in NY or NJ. Federal and state income taxes would just be due on the monthly payments you receive from your annuity.
Best regards,
Kyle
Rb
2024-11-13 13:53:08
I live in the state of Colorado, and have recently did a 1035 exchange of a non-qualified variable annuity from Pacific Life to Fidelity Personal Retirement Annuity.
Does this warrant a 2% fee when the annuity account is moved to Fidelity?
Kyle
2024-11-14 15:20:26
Hi Rb,
Generally, state premium taxes are only applied upon the purchase of an annuitized contract (SPIA,DIA). However, some insurance companies have applied the Colorado state premium tax on all annuity purchases. I would recommend contacting Fidelity to see if the premium tax has been applied in your situation.
Best regards,
Kyle