When a deceased parent's IRA is split equally between two beneficiaries, does each beneficiary get the full $20,000 pension and annuity income exclusion, or must they share a single $20,000 amount?

Plain-English summary

Carol C. Markman, CPA, asked the Department on behalf of a client whether an individual who is one of two beneficiaries of her deceased father's IRA is entitled to the full $20,000 pension and annuity income exclusion under Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2), regardless of what the other beneficiary does. The facts: a father's IRA passed equally to his daughter (45) and son (50), with separate accounts set up for each before the end of the first distribution year. The annual distribution exceeds $20,000, and the son is a nonresident of New York. The petitioner asked whether the daughter's exclusion is affected if the nonresident brother either (1) receives annual distributions from his half, or (2) already took a lump-sum distribution in a prior year and receives nothing in the current year.

The Department explained that Tax Law § 612(c)(3-a) lets an individual age 59 1/2 or older subtract up to $20,000 a year of pension and annuity income, including IRA distributions, from federal adjusted gross income. Under 20 NYCRR 112.3(c)(2)(iv)(a), when a beneficiary receives a payment that qualifies as a pension or annuity created by a decedent, the beneficiary steps into the decedent's shoes: the beneficiary gets the same modification the decedent would have gotten had the decedent lived, regardless of the beneficiary's own age. Here, the father would have been over 59 1/2 when distributions were made, so the exclusion was available to pass through to his beneficiaries.

But 20 NYCRR 112.3(c)(2)(iv)(b) caps the total: if a decedent has more than one beneficiary, the single $20,000 exclusion must be allocated among them in the same ratio as the IRA distribution itself is shared, so the combined exclusion claimed by all beneficiaries never exceeds $20,000 in the aggregate. Because the siblings here split the IRA 50/50, each is entitled to an annual $10,000 exclusion - and that allocation does not change based on the brother's residency status or on whether he takes annual distributions or already exhausted his share through an earlier lump sum. The opinion also flagged that if the daughter later receives her own pension once she turns 59 1/2, her combined subtraction (her own pension plus her inherited-IRA share) cannot exceed $20,000 annually.

What this means for you

Splitting an inherited IRA's exclusion among co-beneficiaries

If you inherit a share of a decedent's IRA alongside one or more other beneficiaries, you don't each get a separate $20,000 exclusion. The single $20,000 annual pension and annuity exclusion that would have belonged to the decedent is divided among all beneficiaries in the same proportion as the IRA itself is divided. A 50/50 split of the account means a 50/50 split of the exclusion - $10,000 each - regardless of each beneficiary's own age, residency, or how much they actually withdraw in a given year.

Coordinating with the decedent's own final return

The Department noted that New York's filing instructions for Form IT-150 and Form IT-201 require a beneficiary's pension and annuity exclusion to first be reduced by any amount the decedent already subtracted on the decedent's own New York personal income tax return. Beneficiaries should check whether the decedent claimed any of the $20,000 exclusion before computing their own allocated share.

Common questions

Q: Does it matter that my co-beneficiary is a nonresident of New York?
A: No. The Department held that the allocation of the $20,000 exclusion by ownership share applies "regardless of ... whether the individual's brother, who is a nonresident, receives annual distributions or elects to take a lump-sum distribution."

Q: My co-beneficiary already took a lump-sum distribution in an earlier year and gets nothing this year - do I get to claim their unused portion?
A: No. The allocation is fixed by the ratio in which the IRA itself is shared (here, 50/50), not by which beneficiary actually withdraws money in a particular year.

Q: I'm only 45 - do I still qualify for the exclusion on my share of an inherited IRA?
A: Yes. Under 20 NYCRR 112.3(c)(2)(iv)(a), a beneficiary is entitled to the same pension and annuity modification the decedent would have received had the decedent lived, "regardless of the age of the beneficiary" - as long as the decedent would have met the age-59 1/2 requirement.

Q: What happens once I reach 59 1/2 and start receiving my own pension?
A: Your total subtraction modification - your own pension or annuity plus your allocated share of the inherited IRA exclusion - still cannot exceed $20,000 annually under Tax Law § 612(c)(3-a).

Q: How exactly is the $20,000 divided among multiple beneficiaries?
A: In the same ratio as the underlying IRA distribution is shared, so that the beneficiaries' combined exclusions never exceed $20,000 in the aggregate. Two equal beneficiaries each get $10,000; unequal shares would produce a proportionally unequal split.

Citations and references

• Tax Law § 612(a) - defines New York adjusted gross income of a resident individual
• Tax Law § 612(c)(3-a) - $20,000 annual pension and annuity income exclusion for individuals 59 1/2 and over, extended to IRA distributions and to payments received by a decedent's beneficiary
• 20 NYCRR 112.3(c)(2) - conditions an individual must meet to claim the pension and annuity income modification
• 20 NYCRR 112.3(c)(2)(iv)(a) - a beneficiary is entitled to the same pension and annuity modification the decedent would have received, regardless of the beneficiary's own age
• 20 NYCRR 112.3(c)(2)(iv)(b) - where a decedent has more than one beneficiary, the $20,000 exclusion is allocated among them in the same ratio as the distribution is shared

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a07_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(3)I
Income Tax
April 13, 2007

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I061017A

On October 17, 2006, a Petition for Advisory Opinion was received from Carol C.
Markman, CPA, Feldman, Meinberg & Co. LLP, 6900 Jericho Turnpike, Suite 312, Syosset,
New York 11791.
The issue raised by Petitioner, Carol C. Markman, is whether an individual who is one of
two beneficiaries of a decedent’s Individual Retirement Account (IRA) is entitled to a $20,000
pension and annuity income exclusion pursuant to section 612(c)(3-a) of the Tax Law and
section 112.3(c)(2) of the New York State Personal Income Tax Regulations (Regulations) if:
1.

the other beneficiary of the decedent’s IRA is a nonresident of New York State and
receives annual distributions from the IRA; or

2.

the other beneficiary of the decedent’s IRA is a nonresident of New York State and
elected to take a lump-sum distribution in a prior year resulting in no distribution
possible in the current year.

Petitioner submits the following facts as the basis for this Advisory Opinion.
An individual is a beneficiary of her father’s individual retirement account (IRA) and, as
a beneficiary, is entitled to one-half of her father’s IRA. Prior to the end of the first distribution
year, separate IRA accounts were established for the beneficiaries by direct transfers of funds.
The annual distribution from the IRA is greater than $20,000. The individual’s brother is also a
beneficiary of the decedent’s IRA and, as a beneficiary, is entitled to the other half of his father’s
IRA. The decedent’s age would have exceeded 59½ at the time when a distribution is made to
his beneficiaries. The individual is 45 years of age and her brother is 50 years of age. The
individual’s brother is a nonresident of New York State.
Applicable law and regulations
Section 612(a) of the Tax Law provides:
General. The New York adjusted gross income of a resident individual means his
federal adjusted gross income as defined in the laws of the United States for the taxable
year, with the modifications specified in this section.
Section 612(c) of the Tax Law provides, in part:
Modifications reducing federal adjusted gross income. There shall be subtracted
from federal adjusted gross income:

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*

*

*

(3-a) Pensions and annuities received by an individual who has attained the age of
fifty-nine and one-half, not otherwise excluded pursuant to paragraph three of this
subsection, to the extent includible in gross income for federal income tax purposes, but
not in excess of twenty thousand dollars, which are periodic payments attributable to
personal services performed by such individual prior to his retirement from employment,
which arise (i) from an employer-employee relationship or (ii) from contributions to a
retirement plan which are deductible for federal income tax purposes. However, the term
"pensions and annuities" shall also include distributions received by an individual who
has attained the age of fifty-nine and one-half from an individual retirement account or an
individual retirement annuity, as defined in section four hundred eight of the internal
revenue code, and distributions received by an individual who has attained the age of
fifty-nine and one-half from self-employed individual and owner-employee retirement
plans which qualify under section four hundred one of the internal revenue code, whether
or not the payments are periodic in nature. Nevertheless, the term "pensions and
annuities" shall not include any lump sum distribution, as defined in subparagraph (A) of
paragraph four of subsection (e) of section four hundred two of the internal revenue code
and taxed under section six hundred three of this article. Where a husband and wife file a
joint state personal income tax return, the modification provided for in this paragraph
shall be computed as if they were filing separate state personal income tax returns. Where
a payment would otherwise come within the meaning of the term "pensions and
annuities" as set forth in this paragraph, except that such individual is deceased, such
payment shall, nevertheless, be treated as a pension or annuity for purposes of this
paragraph if such payment is received by such individual's beneficiary.
Section 112.3(c)(2) of the Regulations provides, in part:
(i) Pension and annuity income not subject to the modification referred to in
paragraph (1) of this subdivision and not in excess of $20,000, received by an individual
may be subtracted in determining New York adjusted gross income providing the
following conditions are met:
(a) the pension and annuity income must be included in Federal adjusted gross
income;
(b) the pension and annuity income must be received in periodic payments (except
where otherwise provided in this paragraph);
(c) the pension and annuity income must be attributable to personal services
performed by such individual, prior to such individual's retirement from employment,
which arises from either an employer-employee relationship or from contributions to a
retirement plan which are tax deductible under the Internal Revenue Code (e.g.,
individual retirement account (IRA) or self-employed retirement (Keogh)); and

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(d) such individual receiving the pension and annuity income must be 59 ½ years
of age or over.
(ii) Distributions from an individual retirement account (IRA) or a self-employed
retirement plan (Keogh) will qualify for the pension and annuity income modification
whether such distributions are periodic payments or a lump sum distribution. However,
the modification referred to in this paragraph will not be allowed for a lump sum
distribution from a self-employed retirement plan (Keogh) if the Federal special 5-year
averaging method of determining the Federal income tax due on such lump sum
distributions is elected (see section 603 of the Tax Law and Part 103 of this Title for
provisions relating to determining the New York State separate tax on the ordinary
income portion of a lump sum distribution where the special 5-year averaging method has
been elected for Federal income tax purposes).
(iii) Where a husband and wife each receives a pension or annuity and each
qualifies for the pension and annuity income modification as described in subparagraph
(i) of this paragraph, then each spouse shall compute his or her own pension and annuity
income modification as if separate Federal income tax returns were filed. The combined
pension and annuity income modification may not exceed $20,000 for each spouse. Each
spouse may not claim any unused portion of the other spouse's modification.
(iv)(a) Where a beneficiary receives a payment which qualifies as a pension or
annuity created by the decedent, such payment will come within the definition and
meaning of "pension and annuity" as defined in this paragraph. The beneficiary will be
entitled to the same pension and annuity income modification that the decedent would
have been entitled to, had such decedent continued to live, regardless of the age of the
beneficiary.
(b) If the deceased has more than one beneficiary, the $20,000 pension and
annuity income modification must be allocated among the beneficiaries in the same ratio
as the distribution is shared so that the total pension and annuity income modification of
all beneficiaries does not exceed $20,000 in the aggregate.
(v) Where an individual claims a disability income modification under paragraph
(3) of this subdivision, the combined amount of the disability income modification and
the pension and annuity income modification cannot exceed $20,000.
(vi) Pension and annuity income not included in New York State adjusted gross
income (e.g., railroad retirement benefits) may not be included in the computation of the
pension and annuity income modification.

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Opinion
Section 612(c)(3-a) of the Tax Law provides that payments received from an individual
retirement account, to the extent includible in gross income for federal income tax purposes but
not in excess of $20,000 a year, may be allowed as a subtraction modification from federal
adjusted gross income when computing New York adjusted gross income if certain conditions
are met. Pursuant to section 112.3(c)(2)(iv) of the Regulations, when a beneficiary receives a
payment that qualifies as a pension or annuity created by a decedent, the beneficiary will be
entitled to the same pension and annuity income modification that the decedent would have been
entitled to had such decedent continued to live, regardless of the age of the beneficiary. If the
decedent has more than one beneficiary, the $20,000 annual pension and annuity income
modification must be allocated among the beneficiaries in the same ratio as the distribution is
shared so that the total pension and annuity income modification of all beneficiaries does not
exceed $20,000 in the aggregate annually.
Accordingly, in the present case, regardless of the age of the beneficiaries or whether the
individual’s brother, who is a nonresident, receives annual distributions or elects to take a lump­
sum distribution in a prior year resulting in no distribution possible in the current year, each
beneficiary is entitled to an allocation of the $20,000 annual pension and annuity income
modification in the same ratio as the distribution is shared. Since both beneficiaries received
one-half of their father’s IRA account, the annual $20,000 pension and annuity income
modification is allocated by the same ratio. Accordingly, with respect to the inherited IRA, the
individual and her brother are each entitled to an annual $10,000 pension and annuity income
exclusion pursuant to section 612(c)(3-a) of the Tax Law and section 112.3(c)(2) of the
Regulations. Pursuant to section 612(c)(3-a), if at age 59 ½ the individual receives her own
pension or annuity, her total subtraction modification may not exceed $20,000 annually.
It is noted that the filing instructions for Form IT-150, Resident Income Tax Return (short
form) and Form IT-201, Resident Income Tax Return (long form), provide, in part, that “the
pension and annuity income exclusion of the decedent that you are eligible to claim as a
beneficiary must first be reduced by the amount subtracted on the decedent’s New York State
personal income tax return, if any.”

DATED: April 13, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.