Do I have to pay Illinois State Income Tax on an non-spousal inherited annuity?

[Cris]

My cousin passed away in 2021 and I inherited a portion of her annuity (as did my 2 sisters).  I took out the total amount of about $19K in 2023.  The taxable amount was about $9K.  Box 7 on the 1099-R showed "4D".  4 for death and D for annuity payment from non-qualified annuities.  When I select the two codes in TT "4" and "D" it increases my IL State Income Tax.  If I just key in "4" I don't owe IL income tax.  So my two specific questions are (1) Does IL tax inherited non-spousal annuities if they are non-qualified? NOTE: IL does NOT tax IRA, 401IK and Pensions so I was surprised that it appears they tax annuities.  (2) TT asks if this was considered an RMD.  Are there RMDs for non-qualified annuities?  Not sure how to answer the RMD questions that TT asks.  I don't believe I had to take an RMD on this annuity as long as it was fully distributed within 5 year (starting in 2021).  Since I took a total distribution all at one time does it really matter how I answer the TT questions about RMDs? BTW, I have not reached RMD age and will not for several years.

[DaveF1006 · Accepted solution]

Yes, according to the state of Illinois, For beneficiaries that are residents, Section 301(a) of the Illinois Income Tax Act allocates their distributive share of the annuity proceeds to Illinois making them subject to Illinois income tax. So by placing D in Box 7, these distributions are taxable by the Illinois Dept of Revenue. 

There is no RMD requirement for inherited non-qualified annuities so you would report that you do not have a RMD requirement.

State of Illinois Treatment of Annuities

[PhilK2]

You can find more detail in the Illinois Department of Revenue publication 120 at https://tax.illinois.gov/content/dam/soi/en/web/tax/research/publications/pubs/documents/pub-120.pdf