Is Maryland Pension Exclusion Calculation correct?

[Don-TT]

I am not expert on the Maryland Pension Exclusion Calculation for those filling Maryland state taxes, but per the link below at one point it was done wrong - I got a letter from the IRS for 2017 about it, about a year ago. Is anyone who really understands how this exclusion works, able to verify that this year the calculation is correct? Thanks!

https://ttlc.intuit.com/community/retirement/discussion/i-think-maryland-pension-exclusion-calculati...

[GeorgeM777]

Yes, TurboTax will calculate what portion, if any, of your pension is not subject to MD tax.  In other words, TurboTax will exclude $34,300 of pension income provided you are eligible for the exclusion.  Complete your federal return first, and especially the part that relates to your pension, before preparing your MD return.  When you are ready to prepare your MD return, you will see the below screen (this was from our test return) that relates to the MD pension exclusion.

If you are 65 or older or totally disabled (or your spouse is totally disabled), you may qualify for Maryland's maximum pension exclusion of $34,300 for tax year 2021.  If you're eligible, you may be able to subtract some of your taxable pension and retirement annuity income from your federal adjusted gross income.

This subtraction applies only if:

1. You were 65 or older or totally disabled, or your spouse was totally disabled, on the last day of the tax year; and
2. You included on your federal return income received as a pension, annuity or endowment from an "employee retirement system." Please note that these include qualified defined benefit and defined contribution pension plans, 401(a) plans, 401(k) plans, 403(b) plans, and 457(b) plans.
3. A traditional IRA, a Roth IRA, a simplified employee plan (SEP), a Keogh Plan or an ineligible deferred compensation plan does not qualify.

@Don-TT

[Don-TT]

Thanks @GeorgeM777 that was a very helpful explanation, I understand and think I can parse through the forms now with a follow-up for you, as I think there is a problem. Here is what I am seeing (this is actually my mom's return that I am doing for her):

TT reports a pension exclusion on line 10, form 502, of $15,665.

That comes from this -- on the Maryland 502 Pension Exclusion Computation Worksheet generated by TT, line 2 is the $34,300 max exclusion you referred to. Line 3 is $18,635, her total Social Security benefits. So line 4 shows an exclusion of $15,665, reported on the 502 line 10. If I understand correctly, that amount is a valid exclusion BECAUSE line 1a on the Maryland 502 Pension Exclusion Computation Worksheet - "Qualified pension and retirement annuity included in Fed AGI" is $18,105. This comes from 2 annuities reported on 1099-R's on the Federal return.

BUT! The $18,105 is not correct, if I understand what you explained! This amount comes from two annuities as I wrote above, but they are CHARITABLE GIFT annuities, and they are most certainly NOT from an "employee retirement system"! Both hard-copy 1099-R's reported show Box 7, "Distribution codes", of "F" - which is "Charitable Gift Annuity" - and that is what they are. Both 1099-R's in TT, Federal forms list, do show the "F" for each. So shouldn't line 1a be $0, and there be no Maryland Pension Exclusion? It appears TT is taking charitable gift annuities and using them for a possible pension exclusion.

Thanks for your review of this!

[Don-TT]

Hi @GeorgeM777 did you see my reply? What do you think?

[GeorgeM777]

The MD pension exclusion also includes retirement annuities.  We understand that the annuities in question have been designated as charitable gift annuities; however, has the surrender period for each annuity expired, and is the annuity owner over the age of 59-1/2?

@Don-TT

[Don-TT]

I am not an expert on this @GeorgeM777 but here is what I think the answers are - if I understand a surrender period, it means the time when the funds can be withdrawn without penalty? As charitable annuities, the principal donated can never be withdrawn (I can verify that if it's important). And yes, the owner is over 59 1/2.

You said the MD pension exclusion includes retirement annuities, but these two are not retirement annuities, with an 'F' designation they are charitable annuities.

[GeorgeM777]

Thank you for that additional information.  Another way of reviewing this matter is to consider what MD has specifically excluded from the pension exclusion.  In this regard, the Comptroller of MD has stated:

"A traditional IRA, a Roth IRA, a simplified employee plan (SEP), a Keogh Plan or an ineligible deferred compensation plan does not qualify." (bolded text in the original)

In other words, MD has specifically identified the types of retirement plans that don't get the benefit of the exclusion, but chose to allow annuities, presumably of all types, to get the exclusion.   If there were a reason to exempt charitable gift annuities from the exclusion, it is reasonable to assume that MD would have included them among the retirement plans that are excluded.  Yet, it is always useful to obtain the opinion of another tax advisor and given the importance of this issue, that may be something to consider.  

@Don-TT

[Don-TT]

So @GeorgeM777 , thanks for the update. I opened TT this morning, and I got an update - I think to software and to forms, seems like it was 2 updates. Anyway, lo and behold before I do anything I check the Maryland return, and the Pension exclusion worksheet is gone, and there is no longer any pension exclusion, and line 10 on the 502 is blank! I ran through the federal section for 1099-Rs again and checked for errors just in case, no errors were reported.

So it sounds like the decision was made that charitable annuities are not the be considered for pension exclusions. This actually makes sense to me, as it is a PENSION exclusion, and there is nothing PENSION-oriented about a charitable donation establishing an annuity, right?

[Don-TT]

Hi @GeorgeM777 did you see my latest post? Was there an update that reversed this so charitable gift annuities are no longer counted?

[dmertz · Accepted solution]

Maryland law states that only distributions from an "employee retirement system" qualify.  A charitable gift annuity is not an employer plan, so code-F distributions never qualify.  TurboTax should know this the same way that TurboTax knows that any Form 1099-R with the IRA/SEP/SIMPLE box marked does not qualify.