Virginia guidance needed - Death benefit exclusion

[FEDUKE404]

A client is currently receiving income reported on two separate Forms 1099-R. The tax documents show Code 4 ("death") and are identified as IRA (box checked) sourced.

These funds are being received by a client whose elderly parent died during 2010.

My question is do these annnual payments qualify for the special VIRGINIA ONLY subtraction from income as reported on Line 6b (code 49) of VA Form 760-ADJ ??

I was a bit unsure after reviewing the relevant verbiage for this type of exclusion:

Subtraction for Certain Death Benefits

Effective for taxable years beginning on or after January 1, 2007, individuals may subtract death benefit payments received from an annuity contract to the extent that such payments are subject to federal income tax. Report on Schedule ADJ, Line 6, Code 49.Code of Virginia Section 58.1-322(C)(32).

Excerpt from the listed Code:

C. To the extent included in federal adjusted gross income, there shall be subtracted:
32. Effective for all taxable years beginning on or after January 1, 2007, the death benefit payments from an annuity contract that are received by a beneficiary of such contract and are subject to federal income taxation. .

Thanks in advance to any fellow professionals in the Commonwealth who might deal with this exclusion on a regular basis and can therefore allay my concerns.

FE

[Burke]

No, they probably do not. I had the very same question based on this law enactment and talked at length a couple of years ago with Tax Dept people in Richmond. It certainly sounds like it from the instructions and the very way the code is written. But apparently it involves only some obscure situations and not the normal code 4 periodic distributions due to death. I will try to find my notes on this and elaborate further. Note that this subtraction refers to annuity contracts from an insurance company that are paid in one lump sum to a beneficiary (rare), and does not apply to IRA's that are not annuities.

[TAX4US]

I ran into this a few years back and agree with Burke on his answer. Periodic 1099R's with 4 on them will not make it work.

[FEDUKE404]

That was my immediate concern

In 2010, there was a single (significant dollar amount) death benefit payment to the beneficiary. The payment was reported on a Form 1099-R, and I was reasonably convinced that it was proper to exclude that one-time payment.

What is now at hand is apparently some "periodic" IRA type of payments to the same beneficiary, aka an "inherited IRA" scenario. My tax logic told me this 2011 twist (it IS different) should not receive the exclusion, but as Burke mentioned there is apparently more to things than what a casual reading of the material in the VA tax resources could provide.

So, unless someone can advise a compelling reason to do otherwise, I will likely not exclude the 2011 income from VA taxation.

Thanks for the insight.

FE

[Burke]

I will try to explore this further with Va Dept of Taxation. It obviously causes a lot of questions, and frankly, they were a little befuddled by it all a few years ago. Maybe there is a tax bulletin on it that I can find.

[FEDUKE404]

VA cite

I will try to explore this further with Va Dept of Taxation. It obviously causes a lot of questions, and frankly, they were a little befuddled by it all a few years ago. Maybe there is a tax bulletin on it that I can find.

This may answer the question?:

http://www.policylibrary.tax.virginia.gov/OTP/Policy.nsf/df8f027f3fea473a8525697a00730e76/a7754a74cceff3168525758d0055a265?OpenDocument

Excerpt:
Therefore, in order to qualify for the subtraction allowed under Va. Code § 58.1322 C 32, a death benefit payment is required to meet the following criteria: 1) the source of the payment is an annuity contract between a customer (the Annuitant) and an insurance company; 2) it has been awarded to the beneficiary in a lump sum; and 3) the payment is subject to taxation at the federal level.

Of course, it might simplify things tremendously if the Va. Dept of Taxation made their instructions for Form 760 a bit more precise...

FE

[Burke]

The 760 instructions for 2011 do include this information. It is the first time I have seen it. The code section is exactly 2 lines long and does not mention this at all. So obviously, there have been a lot of questions about it. The ruling by the tax commissioner cited above indicates the reasoning behind this exception, and it is obvious it was not intended to apply to IRA accounts.