- Not all states charge a tax on annuity premiums.
- In most states, insurance companies are allowed to pass the tax along to customers.
- State premium taxes can be high, so it’s important to know how you might be affected before purchasing an annuity.
State premium taxes are sales taxes assessed on insurance premiums charged for policies issued in that state. Because annuities are insurance products, they are regulated by the insurance commissions in each state. Much of that regulation is relatively uniform, but there are subtle differences. The most significant difference is the tax that each state levies on insurance premiums.
State premium taxes can reduce the value of your annuity if they’re charged at the time of purchase, so be aware of how the premium tax might affect you if you’re considering buying an annuity.
How States Tax Insurance Companies
Except for Illinois and Michigan, states generally don’t tax insurance companies the same way they tax other businesses. States tax other businesses on their corporate income, but insurance companies are taxed on the value of the premiums for policies they write in a state.
Each state is free to tax every aspect of an insurance company’s premiums. That includes premiums they receive from the sale of annuities. And those taxes are almost always passed on to you when you buy an annuity.
Many states that do charge a premium tax on annuities waive it when they are purchased inside a qualified plan, such as a traditional IRA, 401(k) or other type of employer-sponsored retirement plan.
How are state premium taxes different from other taxes imposed on insurance companies?
Most states charge a tax on premiums paid to insurance companies, but not all states go on to charge that tax on annuity premiums. In states that charge a premium tax on annuities, the rate is often different than it is for other types of insurance.
In some states, the premium tax offsets the tax on business income so that an insurance company’s income is not taxed twice.
Some states also charge what’s known as a retaliatory tax, which is assessed based on the state where the insurance company is headquartered.
Other taxes that may be imposed on insurance companies include property taxes, sales and use taxes, franchise taxes and payroll taxes.
When Are Premium Taxes Due?
You will pay state premium taxes at one of two points in time.
If you buy an immediate annuity, you will pay the premium tax upfront. The tax won’t be added to your out-of-pocket premium payment. Instead, it will be deducted from the initial value of the annuity contract.
When you buy a deferred annuity, the insurance company collects the premium tax during the annuitization, or payout, phase. The premium tax will be deducted from the first payment.
Which States Charge a Premium Tax?
Nearly all U.S. states and territories charge insurance companies a premium tax. But not all of those states levy the tax on annuities. Only a handful of states charge a premium tax on annuities.
|State||Annuity Premium Tax Rate as of 2023||Additional Notes|
|California||2.35% on unqualified annuities; 0.5% on qualified annuities|
|Colorado||2% on unqualified annuities; 0% on qualified annuities|
|Florida||1%||No tax on annuity premiums paid by holders in the state if the tax savings are credited to the annuity holders.|
|Maine||2%||No tax on certain historical annuities, retirement annuities issued by certain nonprofit companies, or annuities issued in connection with deferred compensation plans or certain retirement accounts qualified or exempt under federal law.|
|Nevada||3.5% on unqualified annuities; 0% on qualified annuities|
|Puerto Rico||1%||Some exclusions apply, including annuities for the personnel of educational institutions.|
|Texas||0%||Annuities are not subject to a premium tax; However, the state can annually assess a maintenance tax on annuity premiums at a rate not to exceed 0.4%. The maintenance tax rate is determined each year.|
|South Dakota||Up to 1.25% on unqualified annuities; 0% on qualified annuities||For unqualified annuities, a 1.25% tax on the first $500,000 and a 0.08% tax on everything above $500,000 applies.|
|Wyoming||1% on unqualified annuities; 0% on qualified annuities|
Notably, many of the states that do charge a premium tax on annuities waive it when they are purchased inside a qualified plan, such as a traditional IRA, 401(k) or other type of employer-sponsored retirement plan.
What Kind of Planning Can Be Done To Avoid a Premium Tax?
For many people considering an annuity, avoiding the premium tax is simple since most states don’t charge it on annuities. For consumers living in one of the states that charge the tax, there are a few planning considerations that may be available, depending on your situation.
Those already preparing to move to a state that doesn’t charge the tax should consider whether to hold off buying an annuity until after the move is completed.
Those who have a residence in two different states — where one is a high-tax state and the other is a low- or no-tax state — should seek the advice of their financial and legal advisors to determine if purchasing an annuity when living in the home in the low-tax state is possible.
Compliance and Reporting Obligations for Insurance Companies
In states that charge a premium tax, insurers are required to file an annual premium tax return. Most states also require periodic installment payments, usually on a quarterly basis, although the amounts due vary by state. Some states require electronic filing and payment at certain dollar thresholds, which vary depending on the state.
Insurance companies are required to meet deadlines for filing and payment of state premium taxes. They are subject to penalties for failing to file tax returns and for late payment of taxes.
Annuity Premium State Tax Deadlines and Penalties in 2023
|State||Deadline To Submit
|Penalties for Non-Compliance or Late Payment|
|California||Annual return due April 1 for the previous calendar year.Insurers with an annual tax obligation of over $20,000 are required to make quarterly payments.||Late filing penalty of 5% of the amount due up to a maximum of 25%.Late payment penalty of 5% of the unpaid amount plus 0.5% per month for up to 40 months.|
|Colorado||Annual return due March 1 for the previous calendar year.||Late filing penalty of up to $500 for the first violation or $5,000 for subsequent violations.|
|Florida||Annual return due March 1 for the previous calendar year.Insurers also make quarterly installment payments.||Late filing penalty of 10% of the amount due.Late payment penalty of 10% of the amount due.Interest is also charged on the unpaid amount, and rates are updated twice a year (on January 1 and July 1).|
|Maine||Annual return due March 15 for the previous calendar year.Insurers with an annual tax obligation of over $1,000 are required to pay 35% by April 30, 35% by June 25, and 15% by October 31.||Late filing penalty of $25 or 10% of the tax due, whichever is greater.Late payment penalty: 1% of the outstanding ability up to a maximum of 25%.Interest is also charged on the unpaid amount, and the interest rate is set each year.|
|Nevada||Annual return due March 15 for the previous calendar year.Insurers with an annual tax obligation of over $2,000 are required to make quarterly installment payments.||Late payment penalty of 2% for 1–10 days late, 4% for 11–15 days late, 6% for 16–20 days late, 8% for 21–30 days late, or 10% for 31 or more days late.Interest of 1.5% per month is also charged on the unpaid amount.|
|Puerto Rico||Annual return due March 31 for the previous calendar year.||Late filing penalty of 10% for up to 30 days late plus 10% per month after 30 days, up to a maximum of 25% of the tax due.Late payment penalty of 10% annually.|
|South Dakota||Annual return due March 1 for the previous calendar year.Insurers with an annual tax obligation of over $5,000 are required to make quarterly installment payments.||Late filing penalty of 10% after 30 days.Late payment penalty of 1.5% per month.|
|West Virginia||Annual return due March 1 for the previous calendar year.Insurers also make quarterly installment payments.||Late filing penalty of $25 per day.Late payment penalty of 1% of the unpaid portion not to exceed 100% of the tax due.Accrued daily interest is also charged on the unpaid amount, and the interest rate is set each year.|
|Wyoming||Annual return due March 1 for the previous calendar year.Insurers also make quarterly installment payments.||Failure to pay may result in suspension or revocation of the insurer’s certificate of authority.|
Other Factors Related to State Insurance Regulations
Taxation is not the only aspect of annuities that the states regulate. Rates, features and benefits can all vary widely based on the rules and individual tax codes of each state.
The individual states determine which features of a product they will approve for sale. Some states regulate how and to whom an annuity may be sold. Others regulate the types of riders available for purchase.
States may also treat the various types of annuities differently. All annuities are insurance products, but some annuities are also regarded by states as securities.
Under federal law, variable annuities are categorized as securities and regulated by the U.S. Securities and Exchange Commission. Fixed annuities, on the other hand, are not securities and are not regulated by the SEC. And although most indexed annuities are not registered with the SEC, an indexed annuity may or may not be a security.
Regardless of the state in which your annuity is issued, consult with a financial advisor to determine which type of annuity is appropriate for you.
FAQs About State Premium Taxes on Annuities
In most cases, premium taxes are deductible when calculating net business income.
Only California, Colorado, Florida, Maine, Nevada, South Dakota, West Virginia, Wyoming and Puerto Rico impose base premium taxes on annuity providers.
Insurance companies file a premium tax return in each state that requires it. The tax return walks the insurer through the calculation using that state or territory’s tax rate.
Some states charge a lower tax rate on premiums for qualified annuities than they do for nonqualified annuities. Some states also allow deductions for money returned to policyholders prior to the start of annuity payments as well as dividends paid or credited to policyholders. A few states provide other types of tax credits, such as for salaries paid in the state and charitable contributions.
In most states, annuity providers can pass on the cost of state premium taxes to annuity holders. Most states also allow the provider to choose whether to pass on the taxes at the time of purchase or at the time annuity payments begin.
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