An annuity is generally considered to be a financial contract that gives out a series of regular payments over time, commonly used for retirement income. Annuities can be structured in multiple ways, including fixed-period annuities that pay a fixed amount for a specific duration or lifetime annuities that continue payments throughout the life of the annuitant.

Basis of annuity paymnent is not taxable. As an illustration, a taxpayer receives a $400 annuity payment and the contract price or basis is set at $333. Therefore, only $67 of the $400 is taxed instead of the entire amount.