Did replacing a retiree's pension payments with an annuity make the payments taxable in Illinois?

Plain-English summary

Moving pension-payment administration to an annuity company did not automatically make the retirement income taxable in Illinois. Section 203(a)(2)(F) allowed a subtraction for specified federally included retirement distributions. A Section 403(a) annuity purchased by a qualified employee trust could fit that rule.

The documents did not establish whether this annuity qualified. IDOR directed the retiree to obtain that information from the pension program or annuity company.

What this means for you

Confirm the federal provision reported for the annuity distribution. The identity of the new payor is less important than the qualified-plan origin and contract status.

Common questions

Q: Did the GIL definitively approve the subtraction?
A: No.

Q: Could the annuity qualify?
A: Yes, if it was the qualifying annuity described by the federal and Illinois provisions.

Citations and references

• 35 ILCS 5/203(a)(2)(F)
• I.R.C. §§ 401(a), 402, 403(a), 404(a)(2)

Subject

Subtraction Modifications – Pensions

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2013/it-13-0006.pdf

Original ruling text

IT 13-0006-GIL 04/10/2013 SUBTRACTION MODIFICATIONS – PENSIONS
General Information Letter: Income from an annuity purchased for a retiree by a
qualified pension plan may qualify for the subtraction for retirement income.
April 10, 2013
Dear:
This is in response to your letter dated February 14, 2013, in which you request a letter ruling. The
nature of your request and the information you have provided require that we respond with a General
Information Letter, which is designed to provide general information, is not a statement of Department
policy and is not binding on the Department. See 86 Ill. Adm. Code 1200.120(b) and (c), which may
be found on the Department's web site at www.tax.illinois.gov.
In your letter you have stated the following:
I have been receiving a pension from COMPANY1 that was not subject to Illinois
income tax. However, effective January 1, 2013, COMPANY2, per attached copy, will
manage the pension with the purchase of an annuity. Please advise if the annuity is
subject to Illinois State income tax.
The letter from COMPANY1 that you enclosed states:
The RETIREMENT PROGRAM has reached the final agreement with the COMPANY2
regarding the purchase of an annuity contract for COMPANY2 to manage and pay your
retiree pension benefits beginning January 1, 2013.
Response
Section 203(a)(2)(F) of the Illinois Income Tax Act (35 ILCS 5/203) allows an individual to subtract
from his or her adjusted gross income:
An amount equal to all amounts included in such total pursuant to the provisions of
Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408 of the Internal
Revenue Code, or included in such total as distributions under the provisions of any
retirement or disability plan for employees of any governmental agency or unit, or
retirement payments to retired partners, which payments are excluded in computing net
earnings from self employment by Section 1402 of the Internal Revenue Code and
regulations adopted pursuant thereto.
Section 402 of the Internal Revenue Code deals with distributions from employee trusts exempt under
Section 401(a) of the Internal Revenue Code. Section 403(a) of the Internal Revenue Code deals
with annuities described in Section 404(a)(2) of the Internal Revenue Code, which describes certain
annuities purchased by employee trusts exempt under Section 401(a) of the Internal Revenue Code.
It is therefore possible that an annuity purchased on your behalf by the RETIREMENT PROGRAM
would qualify for the subtraction as an annuity purchased by a qualified employee trust under Section
403(a) of the Internal Revenue Code. However, your letter does not contain sufficient information to
make that determination. You should contact the RETIREMENT PROGRAM or the COMPANY2 to
determine whether the annuity qualifies for the subtraction.

IT 13-0006-GIL
April 10, 2013
Page 2
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax