How are 1035 exchanges on a non-qualified annuity handled in Pennsylvania?

[rjs55]

I had no problem on the Federal return as it accepted the Code "6" in Box 7 Distribution Code & didn't count the Gross Distribution as Income. The State (PA) return was a different matter. TurboTax eventually took me to a Gain and Loss Summary screen. When you click on "Edit", I got the Schedule of Gains/Losses screen which pre-filled (with no way to change it) Date Acquired: 01/01/2023 and Date Sold: 12/31/23.  Those dates were totally incorrect!! The only thing you could enter was Cost Basis which wasn't even on the 1099-R form! This really was a transfer of the Gross Distribution in Box 1 from one annuity to another annuity with the Taxable Amount in Box 2a $0.00. To get through this, a Cost Basis had to be entered so I put what we paid when we first opened the annuity on 9/15/2016. The annuity was closed 6/29/2023. This was very frustrating as none of this information was on the 1099-R form or explained very well as you're "walking" through the process on TurboTax!!
Do we have any PA 1035 experts out in the Community? I'd like someone's point of view. Thanks!

[Happy24]

Did you ever get an answer to your 1035 question regarding how PA is handling the 1099-R form.   I was surprised to see the schedule d show up since it's not a sale of anything.

[RogerD1]

For 1035 exchanges PA tax law follows Federal rules.  A Commonwealth of Pennsylvania website states:

"Exchange of Insurance Contracts Under IRC Section 1035

For taxable years beginning after Dec. 31, 2004, Act 40 of July 7, 2005 provides that exchanges of insurance contracts under IRC Section 1035 that are tax exempt for federal income tax purposes are also tax exempt for Pennsylvania personal income tax purposes. Therefore, do not report the gain (loss) on the sale, exchange or disposition of any insurance contracts that include:

• An exchange of a life insurance contract for another life insurance contract, an endowment contract, or an annuity contract;
• An exchange of an annuity contract for another annuity contract;
• An exchange of an endowment contract for an annuity contract;
• An exchange of one endowment contract for another endowment contract if the dates for payments begin on or before the original contract’s payment dates."

You shouldn't be getting a Schedule D from a 1035 exchange - are you possibly getting the Schedule D from the gain or loss on the sale of something else on your return?

[Happy24]

Turbo tax was creating a Sch D in PA and it was looking for basis.   So, originally I did not click the one box that said not taxable in PA.   Once I clicked that, the error on Sch D in PA disappeared by the form still stayed there and it was marked not taxable in PA.