Perhaps, the inherited annuity already has a code 4 on the form for distribution. See 1099-R instructions. Code 4 is the correct code for a distribution to a beneficiary. If the form is correctly coded, the program already knows and does not need to ask.
Thank you for responding. The code is actually 7D. I changed the code to 4 and recalculated. The tax owed amount didn’t change. I inherited this annuity from a deceased parent. The taxable amount is lower than the distributed amount but not by much. Seems every year I question the why I’m taxed on an inherited annuity.
Like any other type of income, inherited annuities are taxable. The timing of the tax event depends on the payout structure and your status as a beneficiary. For example, assume that you inherit an annuity from your spouse, and you choose to stick with the original payment structure, or the 'as-is' option.
You could opt to take any money remaining in an inherited annuity in one lump sum. You'd have to pay any taxes due on the benefits at the time you receive them. Five-year rule: The five-year rule lets you spread out payments from an inherited annuity over five years, paying taxes on distributions as you go.