What will June O'Leary be taxed on when she begins receiving her annuity payments?

When June O'Leary begins receiving her annuity payments, she will be taxed on any amount representing investment gains. This reflects the tax treatment of annuities, where the contributions made to the annuity (the principal or premiums paid) are typically made with after-tax dollars, meaning those funds are not subject to further taxation upon withdrawal. In contrast, the investment gains earned on those contributions are taxable as income when distributed.

Under the taxation rules for annuities, the Internal Revenue Service (IRS) allows tax deferral on the growth of the investment within the annuity. However, once distributions commence, only the earnings portion of the payments is subject to income tax, while the principal portion has already been taxed previously. This method ensures that June only pays taxes on the income generated by her investment rather than being taxed twice on her own contributions.