If a taxpayer's spouse dies during the year while receiving a pension, can the surviving spouse claim two separate $20,000 pension and annuity subtractions on their final joint return?

Plain-English summary

Petitioner Anne G. Kramer's husband died on April 20, 1997. Before his death he earned $20,704 in 1997 on three TIAA annuity contracts that named Petitioner as successor beneficiary under a joint and survivor annuity election. After his death, Petitioner received the remaining $41,408 in 1997 payments on those same three contracts as successor beneficiary. Both spouses were over 59 1/2. Petitioner asked whether Tax Law § 612(c)(3-a) allowed the couple to claim two separate $20,000 pension and annuity subtractions (a combined $40,000) on their 1997 joint return.

The Department said no. Under 20 NYCRR § 112.3(c)(2)(iii), a married couple filing jointly can subtract up to $40,000 total only where each spouse independently receives his or her own qualifying pension or annuity, with each spouse's $20,000 modification computed as if separate returns were filed, and with no ability to use any unused portion of the other spouse's modification. Here, Petitioner did not have her own separate qualifying annuity in 1997 — she received her husband's annuity only as his beneficiary.

Instead, 20 NYCRR § 112.3(c)(2)(iv)(a) governed: a beneficiary who receives a decedent's qualifying pension or annuity is "entitled to the same pension and annuity income modification that the decedent would have been entitled to," regardless of the beneficiary's own age. Because Petitioner's husband would have been entitled to a $20,000 subtraction had he lived the full year, the couple's 1997 joint return was limited to a single $20,000 subtraction, covering both his pre-death annuity income and Petitioner's post-death beneficiary annuity income combined — not $40,000. The Department noted that in each future taxable year that Petitioner continues to receive the annuities as beneficiary, she will separately be allowed her own subtraction of up to $20,000.

The opinion also flagged a separate issue: if the TIAA annuities were wholly or partly attributable to the husband's employment as a New York public employee (for example, at the State University of New York), that portion of the annuity income — for both the husband and Petitioner as beneficiary — would instead be excludable under the public-employee pension exemption in Tax Law § 612(c)(3)(i) and 20 NYCRR § 112.3(c)(1)(i)(a), with only the remaining, non-public-employment portion eligible for the $20,000 subtraction under Tax Law § 612(c)(3-a).

What this means for you

Surviving spouses receiving a deceased spouse's annuity on a final joint return

If your spouse dies during the year while receiving a qualifying pension or annuity, and you begin receiving that same pension or annuity as beneficiary, you do not get to add a second, independent $20,000 subtraction on top of what your spouse would have received. Instead, you step into your deceased spouse's shoes: the joint return is limited to the single subtraction (up to $20,000) that your spouse would have been entitled to for the year, applied against the combined pre-death and post-death annuity income. Starting the following year, you will be entitled to your own up-to-$20,000 subtraction as beneficiary of the same annuity.

Accountants computing the pension/annuity subtraction in the year of a spouse's death

The $40,000 combined subtraction under 20 NYCRR § 112.3(c)(2)(iii) requires that each spouse independently qualify for his or her own pension or annuity income modification in that year. Where one spouse's income for the year consists only of amounts received as a beneficiary of the other (deceased) spouse's annuity, that surviving spouse has not "received his or her own pension or annuity" for purposes of the regulation, so the couple cannot claim two full subtractions. Also check whether any portion of the annuity is attributable to NY public employment (e.g., SUNY): that portion is handled under the separate public-employee pension exemption (Tax Law § 612(c)(3)(i)), not the $20,000 subtraction, and only the remainder is subject to the $20,000 cap.

Common questions

Q: When would a married couple actually be able to claim the full $40,000 combined pension and annuity subtraction on a joint return?
A: Only where each spouse separately receives his or her own qualifying pension or annuity and each independently meets the conditions in Tax Law § 612(c)(3-a) and 20 NYCRR § 112.3(c)(2)(i) (included in federal AGI, paid in periodic payments, attributable to the individual's own personal services or deductible retirement contributions, and the individual is 59 1/2 or older). Each spouse then computes his or her own $20,000 modification as if filing separately, and neither can use the other's unused portion.

Q: Why wasn't Petitioner's post-death annuity income treated as her "own" qualifying annuity?
A: Because she received it solely as the successor beneficiary of her husband's annuity contracts under the joint and survivor election, not by virtue of her own personal services or retirement contributions. 20 NYCRR § 112.3(c)(2)(iv)(a) treats a beneficiary's receipt of a decedent's qualifying annuity as carrying over the decedent's own modification, not as creating a separate one for the beneficiary.

Q: How much could the couple subtract on the 1997 joint return in total?
A: Only $20,000 — the amount the husband would have been entitled to had he lived the full year — applied against the combined $20,704 he earned before death and the $41,408 Petitioner received as beneficiary after his death, not $40,000.

Q: What happens in years after 1997?
A: The opinion states that Petitioner, as beneficiary of her spouse's annuities, will be allowed a subtraction modification of up to $20,000 in each future taxable year that she continues to receive those annuities.

Q: Does it matter that Petitioner was also over 59 1/2?
A: No. 20 NYCRR § 112.3(c)(2)(iv)(a) makes the beneficiary entitled to the same modification the decedent would have had "regardless of the age of the beneficiary" — the relevant age test is whether the decedent was 59 1/2 or older at the time of death, which the opinion assumed was satisfied here.

Q: Does the public-employee pension exemption change this analysis?
A: It can. If the TIAA annuities are wholly or partly attributable to the husband's employment as a New York public employee (for example, SUNY), that portion of the income — both what he earned before death and what Petitioner receives as beneficiary — is instead excludable under Tax Law § 612(c)(3)(i) and 20 NYCRR § 112.3(c)(1)(i)(a). Only the remaining, non-public-employment portion of the annuity income would then be subject to the $20,000 cap under Tax Law § 612(c)(3-a).

Citations and references

• Tax Law § 612(a) - defines a resident individual's New York adjusted gross income as federal adjusted gross income with specified modifications
• Tax Law § 612(c)(3-a) - allows a subtraction of up to $20,000 of pension and annuity income (other than public-employee pensions) for an individual 59 1/2 or older
• Tax Law § 612(c)(3)(i) - subtraction for pensions and retirement benefits paid to public officers/employees of New York State, its subdivisions or agencies, or their beneficiaries
• 20 NYCRR § 112.3(c)(2)(i) - conditions a pension or annuity must meet to qualify for the § 612(c)(3-a) subtraction
• 20 NYCRR § 112.3(c)(2)(iii) - where each spouse independently qualifies, each computes his or her own modification as if filing separately; combined cap of $20,000 per spouse; no transfer of unused amounts
• 20 NYCRR § 112.3(c)(2)(iv)(a) - a beneficiary receiving a decedent's qualifying pension or annuity is entitled to the same modification the decedent would have had, regardless of the beneficiary's age
• 20 NYCRR § 112.3(c)(1)(i)(a) - implements the public-employee pension exemption under Tax Law § 612(c)(3)(i)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a98_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(6)I
Income Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I980305A

On March 5, 1998, a Petition for Advisory Opinion was received from Anne
G. Kramer, 130 East 75th Street, New York, New York 10021.
The issue raised by Petitioner, Anne G. Kramer, is whether section
612(c)(3-a) of the Tax Law permits two $20,000 pension income exclusions on a
married filing joint return for 1997 where one spouse dies during the year and
both spouses were over 59 ½ years of age.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Before Petitioner's husband died on April 20, 1997, he earned $20,704 on
three TIAA annuity contracts that named Petitioner as successor beneficiary upon
his death under the joint and survivor annuity election. Petitioner then earned
$41,408 on the same three TIAA annuity contracts as successor beneficiary from
the date of his death through December 31, 1997.
Section 612(a) of the Tax Law defines New York adjusted gross income of a
resident individual as the individual's federal adjusted gross income with
certain modifications.
Section 612(c)(3-a) of the Tax Law contains a
modification for pension and annuity income, other than pensions and other
retirement benefits paid to public officers and public employees of New York
State, its political subdivisions or agencies or the federal government.
Section 612(c)(3-a) of the Tax Law and section 112.3(c)(2)(i) of the
Personal Income Tax Regulations ("Regulations") provide that pension and annuity
income not in excess of $20,000, received by an individual, may be subtracted in
determining the individual's 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 distributions from an individual retirement account
[IRA] or self-employed retirement plan [Keogh]);
(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 ("IRC")
(e.g., IRA or Keogh); and
(d) such individual receiving the pension and annuity income must be
59 ½ years of age or over.

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Income Tax

Section 112.3(c)(2)(iii) of the Regulations states that:
[w]here 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.
Section 112.3(c)(2)(iv)(a) of the Regulations states that:
[w]here 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. If the decedent was qualified to receive
a pension or annuity and was 59 ½ years of age or over at the time
of such decedent's death, the beneficiary will be entitled to the
same pension and annuity income modification that the decedent would
have been entitled to regardless of the age of the beneficiary.
Pursuant to section 112.3(c)(2)(iii) of the Regulations, Petitioner, on the
joint return, could be allowed a subtraction modification of up to $40,000, only
if Petitioner and her spouse each received his or her own pension or annuity that
qualifies for the pension and annuity income modification. In that case, each
spouse would be entitled to his or her own $20,000 modification, but one spouse
could not claim any unused portion of the other spouse's modification. However,
in this case, Petitioner is not receiving her own annuity, rather she is
receiving her spouse's annuity as the beneficiary.
It is assumed that, at the time of his death, Petitioner's spouse was
receiving a payment that qualified as an annuity pursuant to section 612(c)(3-a)
of the Tax Law and section 112.3(c)(2)(i) of the Regulations.
Therefore,
pursuant to section 112.3(c)(2)(iv) of the Regulations, Petitioner, as the
beneficiary, is "entitled to the same pension and annuity income modification
that the decedent would have been entitled to". This means that, if he had lived
through the entire year, Petitioner's spouse would have been entitled to a
subtraction modification of $20,000 for 1997. Since Petitioner did not have her
own qualifying pension or annuity in 1997, pursuant to section 112.3(c)(2)(iii)
of the Regulations, Petitioner is not entitled to an additional $20,000
subtraction
modification
for
1997.
Therefore,
pursuant
to
section
112.3(c)(2)(iv) of the Regulations, the qualifying annuity subtraction
modification will be limited to $20,000 on the joint return for 1997. However,
Petitioner, as the beneficiary of her spouse's annuities, will be allowed a
subtraction modification of up to $20,000 in each future taxable year that she
continues to receive her spouse's annuities.
It should be noted that if Petitioner's spouse's TIAA annuities are
attributable solely to employment as a public employee of New York State, its
political subdivisions or agencies (for example, the State University of New
York), then Petitioner's spouse's annuity income and Petitioner's annuity income

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Income Tax

received as beneficiary, to the extent included in gross income for federal
income tax purposes, would be excludable under section 612(c)(3)(i) of the Tax
Law for purposes of computing New York adjusted gross income.
Section
612(c)(3)(i) of the Tax Law and section 112.3(c)(1)(i)( a) of the Regulations
contains a modification reducing federal adjusted gross income for pension and
annuity income that is paid to a public officer or a public employee or the
beneficiary of a deceased public officer or deceased public employee of New York
State, its political subdivisions or agencies. If only a portion of the TIAA
annuities are attributable to employment as a public employee of New York State,
its political subdivisions or agencies, then that portion of Petitioner's
spouse's annuity income and Petitioner's annuity income received as beneficiary,
to the extent included in gross income for federal income tax purposes, would be
excludable under section 612(c)(3)(i) of the Tax Law, and the remainder of the
annuity income would qualify for the $20,000 exclusion under section 612-(c)(3-a)
of the Tax Law.

DATED: May 19, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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