Federal Survivor Annuity-Death of Annuitant "Balance of Cost to Be Recovered"

[dawn2me]

My mother received a pension annuity payment from the government  as a Federal Survivor Annuitant.  My mother passed away in 2021 before using all of her tax free benefit credit.  The 1099 shows "taxable amount" of her 2021 gross distribution as UNKNOWN.  Turbo Tax took me through the Simplied Method of calculating the taxable portion of her gross distribution.  After that calculation she is able to reduce the taxable amount of the gross distribution by approximately $3K. Theres is $10K left over on the Simplied Worksheet as the  "Balance of Cost to be recovered"  

The IRS guidelines say that that $10K "Balance of Cost to be Recovered" can be used as a miscellaneous itemized deduction. My tax preparer believes that my mother is entitled to claim the entire $10K balance + the $3K, calculated from the Simplified Method, on line 2B on the 1099 thereby reducing her gross taxable income on the 1040.  

[DianeW777 · Accepted solution]

Yes. The remainder of the cost not yet recovered by the decedent is an itemized deduction on line 16, Schedule A.

Exclusion limited to cost. (IRS Publication 575)

If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost can't exceed your total cost. Any unrecovered cost at your (or the last annuitant's) death is allowed as an itemized deduction on the final return of the decedent.

Prior to 1987 it's likely the three year rule would have been used which means there would be no cost left to recover.

[dawn2me]

Thank you!