Inherited annuity

[amrongreg]

My brother and I each received 50% of our mother's annuity in 2023 upon her passing. We both chose to pay all taxes up front and take the lump sum payments. When I add the 1099-R to my tax return, I go from having a significant refund to owing $1600. Why am I being taxed twice on the inherited annuity if I already paid these taxes when we took the lump sum payment? I feel now that I am being punished because reporting the income most likely threw me into a higher tax bracket. 

[rjs]

You aren't being taxed twice. You didn't actually pay the tax when you got the payment. You had an amount withheld from the payment to be applied towards the total tax on your tax return. The amount that was withheld is a down payment towards your total tax for the year.

The amount that was withheld from the payment should be in box 4 of the 1099-R. When you enter that in TurboTax it will be applied towards your total tax. It will be included on Form 1040 line 25b as a payment that you already made.

[amrongreg]

I understand all of that. What I don't understand is how before entering the 1099-R I was showing a refund. After entering it, I now owe taxes. It's a $10,070 difference between the refund I was expecting and the taxes I now owe. That seems very extreme. At most, I would have expected the refund to lessen - not entirely disappear.

As an inheritance, this just doesn't feel right.

[rjs]

Inherited money does not get any special tax treatment. The full amount that you took out of the annuity is taxable income, the same as if you made that much money at a job. Apparently the amount that you had withheld for taxes was not enough to cover the tax on what seems to be a fairly large amount of additional income.