Taxable portion of nonqualified annuity

[TT2025]

My 1099-R has an amount in box 2a (taxable amount) for a nonqualified annuity purchased with after-tax money. The annuity should therefore be only partially taxable, but after entering the 1099-R, it does not provide any  interview questions that allow me to enter the data needed to calculate the correct taxable amount per Pub 939 General Rule or Simplified Method. Can you tell me where this can be entered?

[TomK2023]

When a value is entered in Box 2a, the program assumes the payer has already performed the calculation for you and skips the interview for cost recovery.

Cause the calculation screens for a non-qualified annuity to generate by following these steps:

1. Temporarily Clear the amount in Box 2a, and Check the box for 2b "Taxable amount not determined."
2. Make sure that the distribution code is correct (usually 7D or 1D for nonqualified commercial annuities).
3. After you click "Continue," the program should now recognize that the taxable amount is unknown and will ask, "Do you need to calculate your taxable income?" or "Was this an annuity?

Since yours is a nonqualified annuity purchased with after-tax money, you typically must use the General Rule (IRS Pub 939).

In the follow-up interview, look for "Choose a Help Method" (or something similar).  Select the option that mentions the General Rule.

If the "Step-by-Step" interview still doesn't appear, try this "reset":

1. Delete the 1099-R entirely from the "Income Summary" page.
2. Click on Tax Tools (left menu), then Tools, and Delete a form. 
3. Look for any "1099-R Worksheet" or "Pension/Annuity Worksheet" and delete them.
4. Re-enter your 1099-R manually (Do not import it.).  Leave Box 2a blank, and Check Box 2b. This should force the program to ask you how to calculate the taxable portion.

[dmertz]

If this was a nonperiodic distribution, taxable gains come out first.  Only after all of the gains have been distributed does the distribution consist of nontaxable investment in the contract.  Pro rating the distributions only applies to periodic distributions.

[TT2025]

This was a periodic distribution, so I assumed prorating would apply, but I just found out they take taxable gains out first even on periodic, so fully  taxable. Thank you.

[dmertz]

To be clear, "periodic distributions" means that the distributions are received after annuitizing the annuity (converting it to an immediate annuity) and such distributions are to be a pro rated mix of taxable earnings and nontaxable investment in the contract.  If you take ad hoc distributions (distributions that you control), they are not considered to be periodic distributions even if taken as equal amounts at regular intervals.