unclaimed death benefit - no 1099-R

[havaru]

Child was a beneficiary on an annuity. After the annuitant died and some time passed, the insurance company gave the account to the state's unclaimed property division. Parents then learned of the property (cash) and claimed it.

A few questions:

1.  No 1099R: Had the child received the money direct from the insurance company a 1099-R would have been sent. I suspect the insurance company has washed their hands of the account, and I'm told the state doesn't generate a 1099R in this situation. Luckily, the amount of principal is known via the original policy documents, and thus the earnings can be deduced. The question: do I file this as Other Income or do I go through TurboTax's I-haven't-received-a-1099R-workflow? Is there a benefit/difference between the two methods?

2. Income classification: The IRS tax docs never explicitly state (that I've found) that the earnings portion is unearned income, but  do frequently state this will be taxed as ordinary income. If it is unearned income, it will fall under kiddie tax provisions and be taxed at the parent's rate. If it is ordinary/earned, it will fall under the child's tax rate. But this is indeed unearned income, correct?

3. 8814 vs 8615: Though it is probably unearned income (see #2), am I correct that this will need to go on the child's Form 8615, rather than the parents using Form 8814? While Form 8814 refers to the child's interest, dividends, and capital gains, it doesn't seem like it had 1099-R-type situations in mind.

4. Earnings only: And I am correct that it is only the earnings portion that is taxable, not the whole amount, regardless of the fact that it came via unclaimed property? I do have concerns of how I'd "prove" this unclaimed property was indeed a death benefit, but that's a different topic.

Thanks in advance for any guidance or comments.

[DianeW777]

You are correct. The income will be reported on your child's return and Form 8615 may need to be used depending on the amount of total taxable income of your child.

The answers to your questions are shown below. 

1. Yes you can file this as other income because it has changed it's character to 'Unclaimed Property'.  Do not go through the 1099-R workflow to indicate you didn't receive one. If you do you will be creating a 'substitute' 1099-R which will not be found by the IRS or yourself.
2. The income to your child is unearned income. However, it would be considered as miscellaneous income and not interest or dividends.
3. You are correct. Form 8615 would be used for your child's return and Form 8814 would not  be allowed to be used. The reason is as you stated. It is not considered interest, dividends or capital gains.
4. Yes, only the earnings portion would be included, however you should be prepared to show that should the IRS question it later.
   • What is Form 8615: Tax for Certain Children Who Have Unearned Income
   • IRS Instructions Form 8615: Unearned Income --   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed earned income). It includes taxable interest, dividends, capital gains (including capital gain distributions), rents, royalties, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, the taxable part of social security and pension payments, and income (other than earned income) received as the beneficiary of a trust.