26 U.S.C. § 72 — Annuities; certain proceeds of endowment and life insurance contracts

This section says how the government taxes money you get from an annuity, an endowment contract, or a life insurance contract. (a) General rules for annuities. If you receive money as an annuity — regular payments for a set number of years or for the rest of your life — that money counts as gross income, unless some other tax rule says otherwise. If only part of a contract pays out this way (for at least 10 years, or for one or more lifetimes), that part is treated as its own separate contract. Your investment in the whole contract is then split between the annuity part and the non-annuity part, based on how much of the value each part represents. Each part also gets its own "annuity starting date" — the date payments from that part begin. (b) Exclusion ratio — the math for figuring out what's tax-free. You don't have to pay tax on the portion of each annuity payment that matches this ratio: your investment in the contract (as of the annuity starting date) divided by the total amount you're expected to get back over time. Multiply that ratio by each payment to find the tax-free part. But you can never exclude more, in total, than the "unrecovered investment" — the amount of your original investment you haven't gotten back tax-free yet. If the person receiving payments (the annuitant) dies after payments start, and some investment is still unrecovered, that leftover amount can be deducted on the annuitant's last tax return. If someone else is entitled to keep getting refund-type payments after the annuitant's death, that person gets the deduction instead, in the year they receive the payments. This deduction is treated as connected to a trade or business for net-operating-loss purposes. Your "unrecovered investment" at any point equals your original investment in the contract, minus all the tax-free amounts you've received since the annuity starting date. (c) Definitions used in figuring the exclusion ratio. Your "investment in the contract" as of the annuity starting date is the total premiums or other payments you made for the contract, minus any amount you already got back tax-free. If the contract promises a refund-like payment to a beneficiary after the annuitant dies — and the expected return depends on someone's life expectancy — you must subtract the present value of that refund (calculated using IRS actuarial tables, without any interest discount) from your investment. A "refund of consideration" includes payments under a life annuity that guarantees a minimum number of payments, but if an employer paid part of the cost, it doesn't include the part of a death payment that isn't traceable to what the employee personally paid. Your "expected return" is calculated using IRS actuarial tables if it depends on anyone's life expectancy; otherwise, it's simply the total of all the scheduled annuity payments. The "annuity starting date" is the first day of the first period for which you receive an annuity payment. (d) Special rules for qualified employer retirement plans. For annuity payments from a qualified employer retirement plan, the exclusion-ratio math in subsection (b) does not apply. Instead, you use a simplified method: divide your investment in the contract by a fixed "number of anticipated payments" taken from an IRS table, and that per-payment amount is tax-free each month (the rest is taxable), until you've fully recovered your investment. If the annuity is based on one person's life, the table works like this: age 55 or younger at the start gets 360 anticipated payments; ages 56–60 get 310; ages 61–65 get 260; ages 66–70 get 210; over age 70 gets 160. If the annuity is based on more than one life, the table uses the annuitants' combined ages: 110 or below gets 410 payments; 111–120 gets 360; 121–130 gets 310; 131–140 gets 260; over 140 gets 210. Rules like those in subsection (b)(2) and (b)(3) — capping the exclusion at your unrecovered investment, and allowing a deduction if payments stop early — apply here too. When figuring your investment under this method, you ignore the refund-feature adjustment in subsection (c)(2). If you get a lump-sum payment when your annuity payments start, that lump sum is taxed under subsection (e) as though you'd received it earlier, and it still counts toward your investment in the contract. This simplified method does not apply if the primary annuitant has already turned 75 by the start date — unless the annuity guarantees fewer than 5 years of payments. If payments aren't made monthly, the calculation is adjusted to fit the actual payment schedule. "Qualified employer retirement plan" here means a plan or contract described in section 4974(c)(1), (2), or (3). Separately, an employee's own contributions to a defined-contribution plan (plus any earnings on them) may be treated as a separate contract for these purposes, and the same is true for contributions to a pension-linked emergency savings account under section 402A(e). (e) Amounts not received as annuities. This subsection covers money you get from an annuity, endowment, or life insurance contract that is NOT a regular annuity payment — as long as no other tax rule already covers it. Dividend-like payments from the contract count as "not received as annuity." If you get such an amount on or after the annuity starting date, all of it is taxable. If you get it before the annuity starting date, it's split: the part treated as coming from the contract's investment gains is taxable, and the part treated as a return of your own investment is tax-free. To split it, the amount is treated as taxable investment gain first, up to the excess of the contract's cash value (ignoring any surrender charge) over your investment in the contract; only the amount above that gets treated as tax-free return of investment. Several special rules refine this "before the starting date" split. If you take a loan against the contract, or assign or pledge any part of its value, that loan or pledge amount is treated as a non-annuity distribution under the income-first rule above — but it does not, by itself, reduce your investment in the contract; if any of it later gets taxed as income, your investment is then increased by that taxed amount. A policyholder dividend isn't taxed under the income-first rule to the extent the insurer keeps it as an additional premium. If you transfer an annuity contract to someone else without getting full value in return, you're treated as having received a non-annuity distribution equal to the contract's cash surrender value minus your investment in it — except this doesn't apply to transfers between spouses or former spouses covered by section 1041(a); and if you are taxed this way, the person you transferred the contract to gets to add that taxed amount to their own investment in the contract. For certain older or specific kinds of contracts, the law keeps the pre-1982 approach instead: money counts as taxable only once your investment in the contract has been fully returned tax-free, and the loan/pledge and income-first rules above don't apply. This older approach applies to: contracts entered into before August 14, 1982 (though any investment added to such a contract after August 13, 1982 is treated as if it were a separate, newer contract); life insurance and endowment contracts generally (except modified endowment contracts under paragraph (10), and except where IRS regulations say otherwise); money from a 401(a) trust, a 403(a) plan, a 403(b) contract, a life-insurance-company employee plan under section 818(a)(3), or an IRA (except as overridden by paragraph (8) below) — a section 404(k) dividend paid to a plan participant is treated, for this purpose, as coming from a separate contract; and full refunds, surrenders, redemptions, or contract maturities. For this older approach, "investment in the contract" as of any date means total premiums paid before that date, minus amounts already received tax-free before that date. (A paragraph (7) that used to appear here was repealed in 1988 and no longer applies.) Two of the categories above — money from qualified-plan trusts/contracts, and money from 529 college-savings plans or Coverdell education accounts — actually get switched back to the newer income-first rule for money received before the annuity starting date, notwithstanding the older-approach list. For qualified plans, the amount treated as tax-free return of investment is the amount that has the same ratio to the distribution as your investment in the contract has to your total account balance (figured as of the distribution, or another time the IRS specifies); if you don't yet have a nonforfeitable right to some of the money, it doesn't count as part of the account balance for this ratio. There's also a transition rule: for a plan that on May 5, 1986 allowed withdrawing your own contributions before leaving your job, this income-first switch-back only applies once your distributions received on or after that date (plus what you got after 1986) exceed what your investment in the contract was at the end of 1986. The same income-first switch-back, using the same account-balance ratio, applies to money from 529 plans and Coverdell accounts. For modified endowment contracts (MECs, as defined in section 7702A), the income-first rule and the loan/pledge rule both apply — even overriding the older-approach carve-out for life insurance and endowment contracts — and for MECs, a pledge or assignment by "any person," not just the contract holder, counts as a distribution. An exception: a pledge or assignment of a MEC doesn't count as a distribution if it's solely to pay for the insured person's funeral-related expenses described in section 7702(e)(2)(C)(iii), and the contract's maximum death benefit is $25,000 or less. For combination contracts that add long-term care insurance, a charge against an annuity's cash value or a life insurance policy's cash surrender value, used to pay for a qualified long-term care insurance rider, reduces your investment in the contract (but never below zero) and is not itself taxable income. Finally, an anti-abuse rule: all modified endowment contracts that the same insurance company issues to the same policyholder in the same calendar year are treated as one single contract, and the same is true for ordinary annuity contracts — except this combining rule doesn't apply to the qualified-plan and education-account contracts described above. The IRS may write further regulations to stop people from getting around these rules by buying a series of separate contracts. (f) Special rules for computing employees' contributions. When figuring the total premiums or consideration paid for a contract (for the investment-in-the-contract calculations above), amounts an employer contributed on the employee's behalf are included only if either: the employee was already taxed on that amount, or the amount would not have been taxable to the employee even if paid to them directly in cash at the time it was contributed. That second option, though, does not apply to employer contributions made after December 31, 1962 that would have escaped tax only because of the foreign-earned-income rule in section 911 — except for certain pension credits tied to services performed before 1963 as a missionary or under specific pre-1962 plan terms, which still count. (g) Rules for transferee where transfer was for value. If someone transfers a contract (or a share of one) for real payment, and the person who gets it (the transferee) does not simply inherit the original owner's tax basis in it, then: only the actual value paid for the contract, plus any premiums the transferee pays afterward, count toward total premiums paid; only tax-free amounts the transferee personally received before their own annuity starting date count as reducing that investment; and the annuity starting date resets to the first day the transferee receives an annuity payment. "Transferee" here also includes that person's beneficiary or estate. (h) Option to receive annuity in lieu of lump sum. Suppose a contract normally pays a lump sum but lets you choose an annuity instead, you make that choice within 60 days after the lump sum first became payable, and part or all of that lump sum would otherwise have been taxable under subsection (e)(1). In that case, none of the lump sum is treated as taxable income at the time it would have been paid. (A subsection (i) that used to appear here was repealed in 1976 and no longer applies.) (j) Interest. If money is being held under an agreement to pay interest on it, that interest must be included in gross income, no matter what any other part of this section says. (A subsection (k) that used to appear here was repealed in 1984 and no longer applies.) (l) Face-amount certificates. For this section, "endowment contract" also includes a face-amount certificate (as defined under the Investment Company Act of 1940) issued after December 31, 1954. (m) Special rules applicable to employee annuities and distributions under employee plans. (Paragraph (1) that used to appear here was repealed in 1974.) When figuring the total consideration an employee paid for a contract, any amount an owner-employee could deduct under section 404 while working as an employee (as defined in section 401(c)(1)) is treated as employer money, not employee money — and any part of the premiums paid while someone was an owner-employee that's allocable to the cost of life, accident, health, or other insurance is left out of the calculation entirely. For certain life insurance contracts — ones bought as part of a section 403(a) plan, or bought by an exempt 401(a) trust with proceeds payable to a plan participant or their beneficiary — any plan or trust contribution deducted under section 404, or trust income, that IRS regulations determine was used to buy the life insurance protection, is taxed to the participant in the year it was used that way. If the insured person dies, the contract's cash surrender value right before death is treated as a payment or distribution under the plan or trust, while the amount paid because of the death that's above the cash surrender value is not taxed under this section — it's handled instead under section 101, the life-insurance-proceeds rule. (Paragraph (4) that used to appear here was repealed in 1982.) A 10-percent tax penalty applies to certain amounts received by "5-percent owners": if someone who is, or has been, a 5-percent owner (or their successor) receives money from an exempt 401(a) trust or a 403(a) plan that IRS regulations determine goes beyond what the plan's own formula provides for them, their tax for that year goes up by 10 percent of the taxable part of that excess. A "5-percent owner" is anyone who, at any time in the 5 plan years leading up to the plan year in which the money is received, meets the 5-percent-owner definition in section 416(i)(1)(B). "Owner-employee" has the meaning given in section 401(c)(3) and also includes anyone for whose benefit an IRA is maintained, as well as anyone who is an employee within the meaning of section 401(c)(1). For this section, someone counts as "disabled" if they cannot do any substantial gainful work because of a medically determinable physical or mental condition that is expected to cause death or to last a long, indefinite time — and they must prove this in whatever form the IRS requires. (Paragraphs (8) and (9) that used to appear here were repealed in 1982 and 1984.) When a distribution or payment goes to a spouse or former spouse (an "alternate payee") under a qualified domestic relations order, as defined in section 414(p), IRS regulations determine how the investment in the contract is split on a pro-rata basis between the present value of that payment and the present value of everything else still owed to the original plan participant. (n) Annuities under retired serviceman's family protection plan or survivor benefit plan. The exclusion-ratio math in subsection (b) does not apply to these military survivor-benefit annuities. Instead, all amounts received after December 31, 1965 stay tax-free until the total tax-free amount received (including anything excluded before 1966 under the prior version of this rule) equals the total consideration paid for the contract, as defined in the relevant cross-referenced section, plus a further amount tied to certain pre-1996 insurance-related consideration. After that point, everything received is fully taxable. (o) Special rules for distributions from qualified plans to which employee made deductible contributions. Certain voluntary employee contributions that were deductible when made ("deductible employee contributions") are, for tax purposes here, treated as if the employer had made them and as money that was never included in the employee's taxable income. (Paragraph (2) that used to appear here was repealed in 1988.) Rules similar to the loan rules in subsection (p) — except for that subsection's dollar-limit exception — apply to determine when these amounts are treated as received; and if accumulated deductible contributions are used to buy life insurance, that use is treated as a distribution to the employee in the year it happens. The IRS must write regulations making sure that these accumulated deductible contributions can't gain extra tax benefits, or dodge normal limits, through rollovers. "Deductible employee contributions" means voluntary contributions made after 1981, for tax years beginning before 1987, that were deductible under section 219(a). "Accumulated deductible employee contributions" means those contributions, increased by allocable income and gains, and reduced by allocable losses, expenses, and any prior distributions traceable to them. "Qualified employer plan" and "government plan" carry the meanings given later in subsection (p). Unless the plan itself says otherwise, distributions are treated as coming from all other money in the plan first, before any accumulated deductible employee contributions are touched. (p) Loans treated as distributions. If a participant or beneficiary gets a loan from a qualified employer plan, that loan is treated as a distribution from the plan. The same is true if they assign or pledge (or agree to assign or pledge) any part of their interest in the plan — that assignment or pledge is first treated as a loan, and thus also as a distribution. This loan-as-distribution rule does not apply, though, if the loan — combined with the outstanding balance of every other loan from the same plan — stays under the lesser of two limits. The first limit is $50,000, reduced by the amount (if any) that the highest outstanding loan balance during the year before the new loan exceeds the outstanding balance on the day the new loan is made. The second limit is the greater of half the present value of the employee's vested accrued benefit under the plan, or $10,000 — and that present value is figured without counting any accumulated deductible employee contributions. Even within these dollar limits, the exception only applies if: the loan must be repaid within 5 years by its own terms (except a loan used to buy a home that will, within a reasonable time, become the participant's main home); the loan must be repaid in substantially level installments, at least quarterly, unless IRS regulations provide otherwise; and the loan cannot have been made through a credit card or similar arrangement. Related employers and related plans (as defined by cross-reference to section 414(b), (c), and (m)) are all combined and treated as one employer and one plan for these purposes. If a loan doesn't qualify for this exception because it fails the dollar limits, no interest deduction is allowed for interest on that loan for the period during which the borrower is a "key employee" (as defined in section 416(i)), or during which the loan is secured by elective deferrals described in section 402(g)(3)(A) or (C). "Qualified employer plan" means: a 401(a) plan that includes a trust exempt under 501(a); a 403(a) annuity plan; or a plan where an employer contributes toward a 403(b) annuity contract for an employee — and it also includes any plan that was, or was determined to be, a qualified employer plan or a government plan. "Government plan" means any plan, qualified or not, that the United States, a state, a political subdivision, or an agency of any of these maintains for its employees. A loan under a contract purchased through a qualified employer plan (and any pledge of that contract) is treated the same as a loan from the employer plan itself. For certain federally declared disasters, the loan limits are temporarily increased for a "qualified individual" — someone whose main home was in the disaster area during the disaster's incident period and who suffered an economic loss from it. During the applicable period tied to the disaster, the $50,000 limit becomes $100,000, and the "half of vested benefit" limit becomes the full vested benefit. Also, if a qualified individual already has an outstanding plan loan, any repayment otherwise due during the disaster's incident period (plus up to 180 days after) can be delayed by a year, later payments are adjusted to reflect the delay and any added interest, and that delay period is ignored when checking the 5-year repayment limit. (q) 10-percent penalty for premature distributions from annuity contracts. If a taxpayer receives money under an annuity contract, their tax for that year goes up by 10 percent of the taxable part of that amount. This penalty does not apply to a distribution that is: made on or after the taxpayer turns 59½; made on or after the death of the contract holder (or, if the holder isn't an individual, the death of the primary annuitant); due to the taxpayer becoming disabled, as defined in subsection (m)(7); part of a series of substantially equal payments made at least once a year for the taxpayer's life (or life expectancy), or for the joint lives of the taxpayer and a named beneficiary — and such payments still count as "substantially equal" even though they're annuity payments, as long as they'd satisfy the required-payout rules that apply to annuities under section 401(a)(9); paid from a plan, contract, trust, or annuity described in subsection (e)(5)(D); allocable to investment made in the contract before August 14, 1982; paid under a qualified funding asset as defined in section 130(d) (regardless of whether there was a formal "qualified assignment"); already subject to the similar penalty in subsection (t) (ignoring that subsection's own age-59½ exception); paid under an "immediate annuity contract" as defined in subsection (u)(4); or made under a contract that an employer bought when terminating a 401(a) or 403(a) plan and is holding until the employee separates from service. If the "substantially equal payments" exception applied, but the payment series is later changed — for a reason other than death or disability — before the later of 5 years after the first payment or the taxpayer turning 59½ (or, if the taxpayer hadn't yet turned 59½, before they do), the taxpayer owes, in the year of the change, the tax they would have owed originally under this penalty, plus interest for the years the tax was deferred. However, exchanging all or part of the contract for another one under section 1035 is not treated as a "change" to the payment series, as long as the combined payments from both contracts together would still satisfy the substantially-equal-payments test. (r) Certain railroad retirement benefits treated as received under employer plans. Any benefit under the Railroad Retirement Act of 1974, other than a "tier 1 railroad retirement benefit," is treated for tax purposes as a benefit under a qualifying 401(a) employer plan. The "tier 2" portion of the payroll taxes that fund these benefits — paid by employees, employee representatives, and employers under sections 3201, 3211, and 3221 — is treated as employee or employer contributions accordingly. The law spells out exactly which part of those taxes counts as "tier 2" for different time periods: after 1984, specific tier-2 tax rates under sections 3201(b), 3211(b), and 3221(b); for services from October 1981 through 1984, specific percentage rates that are given directly in the statute, with different rates for late-1983-through-1984 service; and for service before October 1981, the amount by which the tax actually imposed exceeded what the comparable Social Security tax would have been. None of these treated-as-contribution amounts may be allocated to certain supplemental annuity or "windfall" benefits under specific sections of the Railroad Retirement Act. "Tier 1 railroad retirement benefit" has the meaning given in section 86(d)(4). (s) Required distributions where holder dies before entire interest is distributed. To count as an "annuity contract" for tax purposes at all, a contract must guarantee that: if the holder dies on or after the annuity starting date with money still left in the contract, the rest must be paid out at least as fast as it was being paid before death; and if the holder dies before the annuity starting date, the entire remaining interest must be paid out within 5 years of the holder's death. There's an exception: if part of the holder's interest is payable to a "designated beneficiary" the holder named, and that part will be paid out over the beneficiary's life (or life expectancy) starting within 1 year of the holder's death (or a later date the IRS allows), then that part is treated as fully paid out as of the day those payments begin. If that designated beneficiary is the holder's surviving spouse, the spouse is treated as the new contract holder for purposes of these payout rules. If the contract's holder is not an individual — for example, a corporation or trust — the "primary annuitant," meaning the individual whose life events mainly control the size or timing of payouts, is treated as the holder instead; and if that primary annuitant changes, the change itself is treated as the holder's death for these rules. This subsection does not apply to annuity contracts under an exempt 401(a) trust, a 403(a) plan, a 403(b) program, an individual retirement annuity or account, or a qualified funding asset as defined in section 130(d). (t) 10-percent additional tax on early distributions from qualified retirement plans. This works much like the penalty in subsection (q), but for money from a "qualified retirement plan" as defined in section 4974(c): the taxpayer's tax for the year goes up by 10 percent of the taxable part of the amount received. Many kinds of distributions are excused from this extra tax. The main list covers distributions: made on or after age 59½; paid to a beneficiary or the employee's estate after the employee's death; due to the employee's disability, as defined in subsection (m)(7); part of a series of substantially equal payments, at least annual, over the employee's life (or life expectancy) or joint lives with a named beneficiary (again, annuity payments still qualify as "substantially equal" if they meet the required-minimum-distribution test under section 401(a)(9)); made after the employee separates from service after turning 55; section 404(k) stock dividends; taken because of an IRS levy under section 6331; certain federal phased or composite retirement annuity payments described by cross-reference; or the withdrawal of investment income tied to excess IRA contributions under section 408(d)(4). Beyond that main list, other exceptions cover: medical-expense distributions, up to what would be deductible under section 213 that year (whether or not the employee actually itemizes); payments to an alternate payee under a qualified domestic relations order; distributions from an IRA to someone who has been unemployed and collected unemployment benefits for 12 straight weeks, made during that year or the next, up to what they spent on health insurance for themselves and their family (self-employed people can qualify too if state law would have covered them, and the exception stops once someone has been reemployed for 60 days); IRA distributions used for qualified higher-education expenses (as defined further below); IRA distributions that qualify as first-time-homebuyer distributions (also defined below); "qualified reservist distributions" to reservists called to active duty for more than 179 days or an indefinite period, which may be repaid to an IRA within 2 years after their duty ends, without normal contribution limits and without a deduction for the repayment; "qualified birth or adoption distributions," capped at $5,000 per birth or adoption, taken within 1 year of the birth or the adoption becoming final (for an adoptee under 18, or unable to support themselves, who isn't the taxpayer's stepchild), which may be repaid within 3 years and are treated, once repaid, as if they'd been rolled over; "emergency personal expense distributions," limited to one per year and capped at the lesser of $1,000 or the amount by which the employee's vested plan balance exceeds $1,000, self-certified as being for an unforeseeable family emergency, repayable, and — once used — blocking another such distribution from the same plan for 3 years unless it's repaid or enough new contributions are made; distributions from a pension-linked emergency savings account under section 402A(e); distributions to a domestic-abuse victim, capped at the lesser of $10,000 (adjusted for inflation after 2024, rounded to the nearest $100) or half the vested benefit, taken within a year of an instance of abuse (defined broadly to include physical, psychological, sexual, emotional, or economic abuse and coercive control), self-certified and repayable; distributions to an employee certified by a physician as terminally ill (using the same definition as section 101(g)(4)(A), but looking 84 months ahead instead of 24), which must be properly documented and may be repaid; "qualified disaster recovery distributions" tied to federally declared disasters (defined below); and "qualified long-term care distributions" under section 401(a)(39) — which, if they cover a spouse's long-term-care coverage, only qualify if the couple files a joint tax return. A few limits apply on top of all this: the after-age-55-separation exception and the QDRO exception do not apply to IRAs; and for qualified plans, the substantially-equal-payments exception only starts once the employee has actually separated from service. Just as with subsection (q), if the substantially-equal-payments exception applied but the series is later modified early (other than for death, disability, or certain listed distributions), the deferred tax comes due — plus interest — in the year of the modification, unless the money was rolled into another qualified plan and the combined payments from both plans still meet the test. For these rules, "employee" includes plan participants and, for an IRA, the person the IRA was set up for. A special penalty applies to SIMPLE retirement accounts: withdrawals taken within the first 2 years of participating in the underlying salary-reduction arrangement face a 25 percent penalty instead of 10 percent — unless the money is rolled over because the employer replaced its SIMPLE plan with a 401(k) or 403(b) arrangement. "Qualified higher education expenses" means the same expenses defined in section 529(e)(3), for education of the taxpayer, the taxpayer's spouse, or a child or grandchild of either, at an eligible institution — reduced by amounts already counted toward other education tax breaks under section 25A(g)(2). A "qualified first-time homebuyer distribution" is money used, within 120 days of receiving it, to pay the acquisition costs (including normal closing costs) of a first home for the taxpayer, their spouse, or a child, grandchild, or ancestor of either, who is a first-time buyer — meaning they (and their spouse, if married) had no ownership interest in a main home during the 2 years before buying this one. There's a lifetime cap of $10,000 per person, reduced by amounts already used this way in earlier years. If a distribution meant for this purpose can't be used because the home purchase is delayed or falls through, the money can instead be rolled into an IRA within 120 days (instead of the usual 60) without the normal once-a-year rollover restriction applying to it. Special "recontribution" rules also let someone repay, within a set window, money that was meant to buy a home in a federally declared disaster area but couldn't be used because of that disaster. Distributions from an eligible deferred-compensation plan under section 457(b) of certain governmental employers are treated as qualified-plan distributions to the extent they trace back to money originally rolled in from an actual qualified retirement plan. Certain public-safety workers get a lower age threshold for the after-separation exception: for "qualified public safety employees" — state or local police, firefighters, EMS workers, and corrections or forensic-security officers — and for specific federal law-enforcement, firefighting, air-traffic-control, nuclear-materials-courier, Capitol Police, Supreme Court Police, and diplomatic-security roles, the exception applies after age 50 or 25 years of service, whichever comes first, instead of after age 55. A "qualified disaster recovery distribution" is money taken during the incident period of a federally declared major disaster (through 180 days after a specified applicable date) by someone whose main home was in the disaster area and who suffered an economic loss from it. These are capped at $22,000 total per disaster per person, may be repaid within 3 years with rollover-style tax treatment, and — unless the taxpayer elects otherwise — the taxable portion is spread evenly over 3 tax years rather than taxed all at once. The statute separately defines "qualified disaster," "qualified disaster area," "incident period," and "applicable date" by cross-reference to federal disaster-relief law. (u) Treatment of annuity contracts not held by natural persons. If an annuity contract is owned by someone who isn't a human being — for instance, a corporation or most trusts — the contract stops being treated as an "annuity contract" for most tax purposes, and instead, the contract's "income on the contract" for each year is taxed as ordinary income to the owner that year. Holding the contract as an agent on behalf of an actual person doesn't trigger this rule. "Income on the contract" for a year equals the contract's net surrender value at year-end, plus all distributions ever received under it, minus total net premiums paid (premiums minus any policyholder dividends) and any amounts already taxed this way in earlier years; the IRS may substitute the contract's fair market value for its surrender value where needed to prevent abuse. This rule does not apply to a contract that: an estate acquires because of the insured person's death; is held under a 401(a) or 403(a) plan, a 403(b) program, or an IRA; is a qualified funding asset; was bought by an employer terminating a 401(a) or 403(a) plan and is being held until it's fully paid out to the employee or their beneficiary; or is an "immediate annuity" — one bought with a single payment, that starts paying out within 1 year of purchase, and that pays substantially equal amounts at least once a year. (v) 10-percent additional tax for taxable distributions from modified endowment contracts. If a taxpayer receives money under a modified endowment contract (as defined in section 7702A), their tax for that year goes up by 10 percent of the taxable part of that amount — unless the distribution is made on or after age 59½, is due to disability as defined in subsection (m)(7), or is part of a series of substantially equal payments made at least once a year over the taxpayer's life (or life expectancy) or joint lives with a beneficiary. (w) Application of basis rules to nonresident aliens. When figuring how much of a distribution is taxable to a U.S. citizen or resident, the "investment in the contract" leaves out certain contributions and earnings tied to work performed by a nonresident alien. This excluded category — "applicable nontaxable contributions" — covers employer or employee contributions made for pay earned by someone who was a nonresident alien at the time, where that pay counted as foreign-source income and wasn't taxed under U.S. or any foreign country's law (even though it would have been taxable if paid directly as cash pay). "Applicable nontaxable earnings" covers investment earnings on such contributions, earned while the employee was still a nonresident alien, that also weren't taxed under U.S. or foreign law. The IRS must issue regulations to carry this out, including rules for treating amounts as untaxed under foreign law where appropriate. (x) Cross reference. For limits on adjusting the tax basis of an annuity contract that is sold, see section 1021.