Annuity income

[JackK1]

Can I opt to treat excludable annuity income as taxable in a year when doing so would not change my tax result?

[dmertz · Accepted solution]

No.  The taxable and nontaxable portions of an annuity distribution are determined by law.

Even if you do report a higher amount as taxable than the amount reported in box 2a of the Form 1099-R from the annuity company, it will not change the fact that the legally required amount of your investment in the contract was actually distributed and will not cause more of your investment in the contract to remain in the annuity.  The taxable amount of future distributions from the annuity will not be reduced by you incorrectly reporting the taxable amount.  The IRS automated system might or might not detect your reporting error, but if the inappropriate increase in your AGI it doesn't somehow increase your refund associated with the tax return on which you made the error you might not hear anything about it from the IRS.

[JackK1]

Thank you for your speed, understanding and clarity.

[illini45]

Turbo tax has my annuity reported as IRa distribution...how do I change?

[BillM223]

@illini45

I hate to state the obvious, but when you entered the 1099-R for your annuity, did you click the box for IRA or did you answer the question on the next screen that the IRA box was checked?

And to be sure, was the 1099-R amount found in line 4a and 4b or was it in lines 4c and 4d (where an annuity belongs)?

Note that pension and annuities are taxed pretty much the same way, so they are lumped in together.

[123amf2978]

I have inherited an annuity that was purchased in 1981 under the FIFO method for distributions.  How do I enter through Turbo Tax .... the step-by-step questions force me to choose between the Simplified or General method for determining the taxable portion.  The FIFO method does not apply to the General method.  This is a non-qualified annuity.

[dmertz]

123amf2978, are you saying that the Form 1099-R does not show the taxable amount in box 2a?  If the taxable amount is present and correct, simply indicate either that the box 2a amount is correct or the box 2a amount was used in previous years.

The IRS requires the General Rule to be used for annuities starting before July 2, 1986 and the Three-Year Rule was not used.  If the Three-Year Rule was used, the payments are now generally fully taxable.  The General Rule in TurboTax requires you to calculate the taxable amount yourself, then simply enter the result, so select the General Rule.  TurboTax does not do the calculation for you.

See IRS Pub 575:  https://www.irs.gov/pub/irs-pdf/p575.pdf

[123amf2978]

The annuity was originally purchased in 1981 from an insurance company and then sold to several different insurance companies since then.  This was supposed to be FIFO.  This is the first year of the distribution and the current financial institution does not have record of the original cost.  So, yes, the box does not show taxable amount.  So, are you saying that the FIFO method cannot be used then?

[123amf2978]

Can you explain the 3-year rule please?

[123amf2978]

Doesn't the three-year rule apply to gifting 3 years prior to death?  This annuity was inherited.  Thank you for your help.

[dmertz]

I have no specific knowledge of the Three-Year Rule.  I simply quoted what is in IRS Pub 575.  However, the implication seems to be that previous distributions under the Three-Year Rule would have have long ago distributed all of the investment in the contract, making current distributions fully taxable.  However, given that there have no distributions until now, it seems that the Three-Year Rule would not have been used.

To find the details of the Three-Year Rule you would probably need to find a copy of the tax code as it existed prior to the changes made by the Tax Reform Act of 1986.

[dmertz]

Assuming that this distribution was a nontaxable distribution of investment in the contract, your tax return will probably need an explanation statement as to why the distribution was nontaxable, otherwise the IRS might question reporting a $0 taxable amount (which you would indicate by entering $0 for the General Rule).

[sss53]

I have the similar question as I believe Turbo Tax has an error in these calculations.    If I check my approximate $18,000  annual income from monthly payments is checked as being used, I have to pay money to IRS but if I say it was rolled over I get a refund of $4,000 plus.   There cannot be that much different in that small of income.  Something is not correct.   I have been trying to reach out to talk to Turbo Tax Deluxe representative and cannot get a telephone number or someone to respond to me!!!!!

[gloriah5200]

No, if you did not actually roll-over the distributions received to another institution within the qualified period, then you cannot mark the box saying it was rolled-over to reduce your tax liability and increase your refund. If you did rollover the distribution or a portion of the distribution, you should have received tax reporting documentation that would be used to complete any roll-over information if it was not taken into consideration on your original 1099-R distributed.

Retirement Plan Eligible Rollover 

[dmertz]

An increase of $4,000 in tax liability for an taxable distribution of $18,000 is well within the realm of possibility and might even be considered to be highly likely.  $4,000 is only 22% of $18,000 and 22% is one of the tax brackets that many people find their last dollars of income to fall in.  Even those whose additional income might not fall in the 22% tax bracket can find their marginal tax rate to be substantially higher than their tax-bracket rate due to the effects of increasing AGI, such as potentially increasing the amount of Social Security income that is taxable.

Your periodic distributions received as an annuity/pension are not eligible for rollover, so you are not permitted to report them as having been rolled over.