Kiddie Tax - 1099-R code 4

[Bill Tubbs]

Working on a 2005 return...

Taxpayer is 14yo and has $1853 of interest on 1040 Line 8a, plus $2475 of income on 1040 Line 16b (Annuity). The annuity income was inherited from father, and reported on a 1099-R with code 4. AGI thus is $4328 ($1853 + $2475).

My question is on Form 8615 what value goes on Line 1? This income does not seem to me to be investment income, so I would think only $1853 goes on line 1. BUT, the instructions for line 1 say to take AGI minus Earned Income -- and since the 1099-R is not Earned Income, looks like line 1 would then be $4328.

Obviously I would prefer to put $1853 on Line 1 to save client some tax. Anyone have any substantiation for that position?

Thanks,
Bill

Additional: The annuity account was a tax-sheltered annuity under 403(b), would that money then be considered "earned income" for her? It was her father's earned income, so when she inherited it does it maintain its character of being "earned income"?

[OldJack]

Bill, I don't know as I have never had this tax situation. However, I expect that all retirement plan type income retains its tax attributes when inherited.

[Mike Mac]

Annuitant Income

I had the same situation for a number of years with a client's children Bill. As much as we disliked it, the 1099-R income gets lumped in with any other unearned income and it triggered the children income to be taxed at the surviving parent's tax rate.

[Bill Tubbs]

Mike -- that is pretty much was I have been thinking. Just trying to see if there was any basis for treating it as I would prefer to. Doesn't sound like it though...

Old Jack -- thanks for your 2cents as well. After thinking about it some more, is a 403(b) account, even for the account holder, still "earned income"? When they pull money out, it doesn't allow them to fund an IRA or qualify them for EIC. So, if it's not earned income then for the account holder, and if the tax attributes are retained when inherited, I'm now thinking that it can't be earned income for the beneficiaries...

Anyone else have any thoughts that may help?

Bill