Frequently Asked Questions	Printer-friendly version

I contributed funds to my IRA with the intention of attributing them to the prior year. Why was this not done?
We assume that your contribution is for the current year, unless you inform us that it is intended for the prior year. You can still attribute your contribution to the prior year (if the contribution is made by April 15 of the following year) on your tax return, but it's a good idea to contact us so that we can send you a revised Form 5498 for your records.

Why didn't I receive a tax form for my IRA transfer?
The IRA transfer is a nonreportable event.

I am on disability. Why wasn't an exception distribution code reflecting this on my tax form?
The Prudential division that handles your contract does not code for disability on the tax form. You can instead complete IRS Form 5329 when you submit your income tax return.

What does the distribution code on the tax form mean?
The distribution code indicated on the form identifies its characteristics. For example, a Code 1 indicates a premature taxable distribution that may be subject to an additional 10 percent tax. A Code 4 indicates it is a death benefit, and so on. A full description of all distribution codes is listed on the back of the form you receive.

When are tax forms mailed, and do I receive one every year?
We generally mail all tax forms by January 31. The type of account you have and the activity in your account will determine which tax forms, if any, you will receive. A tax form will be generated if you make a transaction or if you receive more than $10 in dividends and capital gain distributions.

When will I receive a tax form to report my IRA contribution?
You will receive a Form 5498 by January 31 if you make a contribution into a Coverdell Education Savings Account, formerly called an Education IRA, by December 31, 2001. If you made a contribution into a traditional IRA, Roth IRA, or SEP, Form 5498 will be mailed by May 31.

I received a Form 1099-DIV for my non-IRA investments, but not for my IRA. Why is that?
The Form 1099-DIV is used to report taxable dividends and capital gains paid on non-retirement accounts. Since capital gains and dividends paid to IRA accounts are tax deferred, they do not generate reporting. A Form 1099-R will be mailed to you only when you receive a cash distribution from your IRA(s).

How should I report the amounts from the tax forms on my personal income tax form?
We have included helpful hints throughout the Tax Season Survival Guide referring you to the lines on IRS Form 1040 where the information we provide you should be reported. For more assistance, we suggest that you seek the advice of your financial professional or tax adviser. You can also contact the Internal Revenue Service at (800) 829-1040.

I am 55 years old and my company is going through a downsizing. I am thinking about retiring. What options and/or drawbacks are there to accessing my annuity contracts for income needs?
Most distributions of earnings from an annuity prior to age 59½ are subject not only to ordinary income tax, but also to a 10 percent tax penalty for early withdrawal. However, there are ways to take distributions (generally based on life expectancies) that can satisfy your income needs and still avoid the tax penalty.

I am thinking about providing for a child's education through a gift. Is an annuity a good vehicle for doing this?
As a tax-deferred investment, an annuity may at first seem like an attractive vehicle for funding a child's education. The child, however, will incur not only ordinary income tax, but also a 10 percent tax penalty for any withdrawal of earnings from an annuity prior to age 59½. Since the funds will be accessed at or around the child's 18th birthday, the only way this type of investment would be suitable is if the tax-deferred benefit outweighs the adverse tax consequences when the funds are needed.

I didn't take any money out of my annuity contract this year. Why did I get a tax form?
You may have received a tax form resulting from a request for a change in ownership or collateral assignment, or if your contract is owned by a trust or corporation.

I withdrew money from my annuity last year. Why didn't I receive a tax form?
It is possible that your transaction did not result in a taxable gain. Prudential does not report any distributions from a deferred annuity if there isn't any taxable amount realized from the transaction.

I own several nonqualified annuity contracts bought in the same year and would like to take a distribution from one of them. How can I determine which annuity will have the smallest taxable gain?
The IRS requires that all nonqualified annuities purchased after October 21, 1988, by the same person, from the same provider, and in the same calendar year be treated as though they were a single annuity. When determining the taxable portion of a distribution, this is commonly known as "aggregation." When your contracts are aggregated, a distribution from any of the contracts would have the same taxable amount regardless of which contract you choose.

My former spouse was awarded half of my annuity contract as part of our divorce settlement. Will I have to pay taxes on the distribution?
Generally, it would be your ex-spouse's responsibility to handle the tax consequences of any distributions made to satisfy your divorce settlement. There may be specific provisions in your divorce documents that state otherwise. You should consult your attorney for a definitive answer.

I thought a "1035 exchange" was a tax-free transaction. Why did I get a tax form?
Although a 1035 exchange is generally a tax-free transaction, it is still a reportable event. If you had an outstanding loan at the time of the exchange and it was not reflected on the receiving policy, your loan would have been considered "boot." That's the term used for a taxable amount resulting from an otherwise tax-free exchange.

When I withdrew funds from my annuity, you withheld federal taxes even though I asked that no taxes be withheld. Why?
There are certain situations in which we may not be able to honor a request regarding federal tax withholding. Some of these include:

• Payments made to a location outside of the United States or any of its possessions.
• Payments made from a contract that either is, or once was, part of a pension plan, 403(b) or similar retirement vehicle.
• Payments made from a contract after we had received a "B Notice" from the IRS informing us that you, as a taxpayer, had previously underreported your income.
• Payments made from contract after we have received a "C Notice" from the IRS informing us that you, as a taxpayer, had previously underreported your income.

What is the current cost basis in my nonqualified contract?
The cost basis of a nonqualified annuity contract is, generally, premiums paid plus any gain previously recognized, less any amounts previously distributed. Since your contributions are made with after-tax dollars, they will not be taxed when they're withdrawn. Your investment income will be taxed as ordinary income upon withdrawal. (An additional 10 percent "early withdrawal" penalty may apply for withdrawals made before age 59½.)

I am the owner of an annuity contract, and the annuitant passed away last year. I did not receive any of the proceeds from this contract as a part of the claim against this contract. Why did I receive a tax form?
It is our understanding of the applicable laws surrounding death claims and gift taxes that you, as the surviving owner of an annuity contract after a death claim becomes payable, are responsible for any tax liability that may have come as a result of this claim, even if you are not the beneficiary of this contract.

Why do I have a capital gain distribution when my fund value is down?
Realized capital gains must be distributed to mutual fund shareholders. Unrealized losses on assets held by the fund cannot offset realized gains.

I am taking substantial and equal distribution payments from my annuity, however the 1099R I received is not coded with a distribution code exempting me from the 10% premature withdrawal penalty. Why?
Generally if you are receiving distributions which are part of a series of substantial and equal payments you must use an IRS approved distribution method. Prudential currently has a quote system and through the 888-778-2888 Annuity Service Line you can obtain and must accept this quote in writing or possibly match a distribution you already are receiving by using this quote system. This would be the only way that Prudential can code for this exception. However it is our understanding that if you received a Prudential quote and if you meet the IRS requirements, you may file Form 5329 to the IRS on your own through your tax or legal advisor requesting the exemption.

Am I eligible for the new lower capital gains tax rates?
Effective for 2001; the maximum capital gains tax rates for assets held more than five years are 8% (for taxpayers in the 15% or lower tax brackets) and 18% (for all others). The 18% rate only applies to assets for which the holding period began after December 31, 2000. An election is available to treat an asset held on January 1, 2001 as having been sold for its Fair Market Value and as having been reacquired for the same amount. Any gain will be recognized and any loss disallowed under the wash sale rules. You may wish to discuss this strategy, as well as other related issues, with your tax advisor.

If you elect to treat the assets as sold and repurchased, you will not be able to utilize the cost basis information provided in future years on your Form 1099-B statement. The statement numbers will continue to reflect your original cost.

What is the Qualified 5 years gains column?
This is new for 2001. Assets held for more than five years are eligible for a lower capital gains tax rate. This column reflects the capital gains related to assets held by the fund for more than five years. Include this amount with all other Qualified 5 year gains.

Neither Prudential nor its sales professionals render tax or legal advice. Please consult your tax or legal adviser before making any tax-related investment decisions.