What You Need to Know
- Tax law requires the IRS to update the annuity valuation mortality tables every 10 years.
- The new tables are based on the 2010 census and replace tables based on the 2000 census.
- One implementation principle: You can have fun with extra decimal places.
The Internal Revenue Service is changing part of the financial machinery inside annuities, charitable giving and estate plans — in a friendly way.
The agency recently completed work on final regulations updating the official actuarial tables used to value annuities and other arrangements tied to how long people live, to reflect the results of the 2010 U.S. census. The final regulations will appear in the Federal Register Wednesday and apply to transactions completed after May 31, 2023.
For example, the life expectancy used in annuity valuations for a newborn, assuming an interest rate of 0.2%, will increase to 72.4320 years, from 70.9197 years in the current tables, which are based on the 2000 census.
For a 65-year-old, assuming an interest rate of 2.2%, life expectancy will increase to 14.9013 years, from 14.0065 years.
What It Means
Life insurers, accounting firms, software vendors and other firms will have to update any products or tools they offer that incorporate the IRS annuity valuation tables.
Because the new tables are based on data collected in 2010 — nine years before COVID-19 appeared — they will reflect a sunny world in which mortality was falling and life expectancy was increasing, rather than a world where COVID-19 pushed the death rate higher.
Internal Revenue Code Section 7520
The IRS is part of the U.S. Treasury Department.
Section 7520 of the Internal Revenue Code requires the Treasury secretary to use census data to update the annuity valuation mortality tables every 10 years.
The mortality tables based on the 2000 census have been in use since May 2009.
The IRS put a draft version of the mortality table update regulation in the Federal Register in May 2022.
The agency received just eight comments on the draft, but it responded to the commenters’ requests by providing flexibility in connection with retroactive use of the new mortality tables and in connection with calculation precision.
Originally, the IRS was going to let taxpayers choose whether to use the new valuation tables during a transition period lasting from Jan. 1, 2021, to June 1, 2023.
Some commenters said the transition period ought to start in May 2019, because the mortality tables based on the 2000 census have been in use since 2009.
“The Treasury Department and the IRS have concluded that the issue of fairness to taxpayers in this circumstance outweighs the foreseeable administrative burdens on the IRS,” officials said in the introduction to the new final regulations.
Because of concerns about fairness, the IRS will let taxpayers choose whether to use the old mortality tables or the new tables for transactions occurring between May 1, 2019, and June 2, 2023, officials said.
Several commenters noted that, in the draft regulations, the IRS showed factors and calculation results featuring numbers with digits ranging from three to six places past the decimal point.
IRS officials reported that they used decimal place practices that have been in force since at least 1951. “There are technical reasons for the particular number of decimals used for several of these factors,” officials added.
The IRS decided to stick with the traditional decimal practices, but officials indicated that taxpayers can use more decimal places than the IRS uses, if using more decimal places is more convenient or produces better results, as long as the taxpayer applies the more precise calculation method in a consistent way.
The IRS listed Mayer Samuels as the contact person for the new final regulations.