Upon the death of Mathew, how will the proceeds from the annuity he purchased, naming his wife Cher as the beneficiary, be taxed?

When an annuity is involved, the tax treatment of the proceeds depends on various factors, including the type of annuity and the relationship between the annuity holder and the beneficiary. In this scenario, since Mathew purchased an annuity and named his wife, Cher, as the beneficiary, the proceeds from the annuity will generally be taxed as ordinary income.

This is because annuities typically consist of two components: the principal (the amount originally invested) and the earnings (accumulated growth). When the annuity is paid out upon Mathew's death, the beneficiary receives both the principal and the earnings. The earnings portion is subject to income tax, as it is considered a form of income. Therefore, Cher would need to report the earnings received as ordinary income on her tax return.

This treatment avoids issues of capital gains taxation, which applies to investments sold at a profit, and inheritance tax, which would only apply in specific jurisdictions and under certain conditions upon the transfer of an estate. Given these considerations, the correct understanding of the tax implications in this specific situation leads to the conclusion that the proceeds are taxed as ordinary income.