Part of each annuity payment is a tax-free return of your money. See the split.
Estimates the tax-free and taxable portions of non-qualified annuity payments using the exclusion ratio.
For a non-qualified annuity funded with after-tax dollars, the exclusion ratio is your cost basis divided by the expected total of all payments, and that fraction of each payment is returned tax-free. The remainder of each payment is treated as taxable earnings. This spreads the return of your original premium evenly across the expected payout period.
Once you have recovered your full basis, typically around your life expectancy, later payments generally become fully taxable, which this simple model does not adjust for. The calculation also depends on the expected number of payments, which for a life annuity is based on actuarial tables rather than a guaranteed term. It does not address early-withdrawal penalties, qualified annuities, or state tax, so treat it as a planning approximation.
It is your cost basis divided by the expected total payments, and it sets the share of each payment that comes back tax-free. The rest is taxed as earnings.
No, once you have recovered your full basis, usually near life expectancy, additional payments generally become fully taxable. This tool does not model that later switch.
No, it assumes a non-qualified annuity funded with after-tax dollars. Annuities inside an IRA or similar account are taxed differently, so consult a tax professional.
See the exact formula and a worked example on our methodology page.