Below are some quick and dirty rules for taxation of annuities:

i. Return of investment is not an accession to wealth, not gross income.

ii. Interest earned on investment is gross income.

iii. For each payment, prorate evenly between return of investment and interest, reporting only the portion of the payment that represents interest.

iv. Exclude from income:

• investment in k (amt. you give annuity co.) / expected return (principal amt. + interest) x yearly payment

v. If the annuitant elected to receive payment over his life and:

• lives beyond his life expectancy: the entire payment is taxable
• passes away sooner than life expectancy: can deduct the unrecovered investment