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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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My mother, who lived in Arkansas, died in 2004 and left my

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My mother, who lived in Arkansas, died in 2004 and left my brother and sister and me 2 annuities. They matured last year and the proceeds were divided and distributed among us. I know that the taxable part of the proceeds for federal purposes are the increase in value since her death. How does Massachusetts treat inherited annuities. Is the total amount taxable?
Submitted: 7 years ago.
Category: Tax
Expert:  Stephen G. replied 7 years ago.

Hi & thanks for using our service. I'll do my best to give you an a complete & accurate answer. Please ask me to clarify anything you don't understand.


Was her estate or trust the beneficiary of the annuities & you & your brother & sister "left" the matured proceeds through the estate or trust, or were you all beneficiaries of the annuity contracts directly?


Was the estate or trust required to file income tax returns?

Customer: replied 7 years ago.
We were directly designated beneficiaries on each of the annuities.
Expert:  Stephen G. replied 7 years ago.


OK, I guess you're going to need to tell me what exactly is on the 1099-R.


I assume that the estate wasn't large enought to generate an estate tax?


Do you know when the annuity contracts were issued? If they were variable annuities issued before 10/21/1979, they are treated one way & if issued after 10/29/1979, another way. If they were fixed rate annuities, they are handled the same way as the post 1979 contracts.


The issue being how the accumulated interest at your aunt's DOD is treated.



Edited by Stephen E. Grizey, CPA on 4/1/2010 at 7:43 PM EST
Customer: replied 7 years ago.


They were fixed rate annuities, purchased on 7/11/2000 and 8/31/2000.


The 1099-R forms gave information in the following boxes:


Box 1-Gross distribution

Box 2a-Taxable amount (the increase over the original cost of the contract).

2b - Total distribution checked.

Box 4-Federal Tax withheld and (which I requested.)

Box 5-amount of original investment.

Box 7-Distribution Code 4.

Box 9a - your percentage of total distribution.

Box 10 State tax withheld (which I requested)

Box 11-State/Payer's state number.

Expert:  Stephen G. replied 7 years ago.


Box 2(a) is your taxable income; but it isn't the "increase" since her DOD, it is the "increase", ie. Deferred Income at her DOD plus the interest to the date it was paid.


Massachusetts tax treatment is the same, and would be taxable to the recipient if received as a MA resident.


The only other issue would be if there was a taxable federal estate. The accumulated value of the annuities would have been includable in her estate, including the increase in value from her original costto her DOD, which is called "income in respect of a decedent". If that were the case, you would be entitled to a miscellaneous tax deduction on Schedule A for your portion of the estate tax attributable to your share of the "income in respect of a decedent".


Please remember to click on the green "ACCEPT" "ICON" & thanks again for using our service. Feedback, if you have time, is most appreciated.

Edited by Stephen E. Grizey, CPA on 4/1/2010 at 8:47 PM EST
Customer: replied 7 years ago.

I understand that the taxable amount in 2a is the appreciation over the entire period of the annuity, not just from the DOD.


The question I was asking was about the way in which Massachusetts taxes the annuity. Is it just the taxable amount in Box 2a? or do I have to pay taxes on the entire lump sum distribution which is what my tax software seems to indicate since I didn't roll it over when I received it. Can you please clarify your answer on this point? Thanks.

Expert:  Stephen G. replied 7 years ago.


As i stated, MA treats it the same as the federal. Obviously, I can't speak for your tax software, but you may have to input a cost figure differently for MA. Half of these software companies have programing problems with MA. I mean, why would MA try & tax you on your mother's original contributions to the annuity. It has nothing to do with income.


This is why I thought you might be mistaken on what was taxable: (from you question).

"I know that the taxable part of the proceeds for federal purposes are the increase in value since her death".




Customer: replied 7 years ago.
Sorry, I misspoke about the taxable amount in 2a. If this is the only portion taxable in Massachusetts, where do I put the income on my return?
Expert:  Stephen G. replied 7 years ago.



Form 1, page 1, line 4


the "see instructions" note doesn't pertain to you

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