Did five federally taxable survivor-annuity lump sums qualify for Virginia's death-benefit subtraction?

Subject

Five survivor annuity lump sums qualified for death-benefit subtraction

Plain-English summary

Virginia allowed the beneficiary to subtract the federally taxable portions of five survivor-annuity lump sums received after her father's death. The annuities had been established by her father with an insurance company, and the payments were reported for federal income-tax purposes.

The ruling identified three requirements for the historical subtraction: the payment had to come from an annuity contract between the annuitant and an insurance company, be awarded to the beneficiary in a lump sum, and be subject to federal income tax.

All five payments met those conditions. Virginia reversed the adjustment that had disallowed the subtraction and directed reprocessing of the 2008 return.

What this means for you

• The source must be an insurance-company annuity contract.
• The benefit must be paid as a lump sum under the rule applied here.
• Only the amount subject to federal tax was eligible for the subtraction.
• Keep the annuity contract, beneficiary statement, distribution records, and federal tax reporting.

Common questions

How many annuities were involved?

Five.

Did all five qualify?

Yes.

What happened to the 2008 return?

Virginia said it would be reprocessed with the subtraction allowed.

Citations and references

• Va. Code § 58.1-322(C)(32).
• Virginia Public Document 09-36.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-63

Original ruling text

May 7, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter of March 29, 2009, in which you seek correction of an individual income tax assessment. You ask that the survivor annuity benefit payments that you have received from * be allowed as a subtraction under Va. Code § 58.1-322 C 32. I apologize for the delay in this response.

FACTS

* (the "Beneficiary") received lump sum death benefit payments from five (the "Annuities") following the death of her father, (the "Annuitant"), in 2008, with a total taxable amount of . All five annuities had been established by the Annuitant with the **. The details of these Annuities; are as follows:

Annuity 1. The gross distribution from this annuity was * with a taxable amount of ***;

Annuity 2. The gross distribution from this annuity was * with a taxable amount of ***;

Annuity 3. The gross distribution from this annuity was * with a taxable amount of ***;

Annuity 4. The gross distribution from this annuity was * with a taxable amount of ***; and

Annuity 5. The gross distribution from this annuity was * with a
taxable amount of ***.

Based on the information provided, the death benefit payments from the Annuities were reported for federal income tax purposes; and the interest earned from the initial investments was subjected to federal income taxation.

You believe that the Department of Taxation disallowed the subtraction you claimed on your 2008 Virginia Individual Income Tax return in error.

DETERMINATION

Pursuant to Va. Code § 58.1-322 C 32 and effective for taxable years beginning on and after January 1, 2007, a taxpayer is allowed a subtraction for death benefit payments received from an annuity contract to the extent that such payments are subject to federal income taxation. In order to qualify for the subtraction allowed under Va. Code § 58.1-322 C 32, a death benefit payment must meet three requirements (See Public Document ("PD") 09-36 (3/31/2009)). First, the source of the payment must be an annuity contract between a customer (the Annuitant) and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level.

Based on the information provided by you, the survivor annuity benefit payments in this case satisfy all three of these criteria. The information demonstrates that the survivor annuity benefits were derived from a contract between an annuitant and an insurance company, received as a lump sum, and subject to federal taxation. Therefore, your survivor annuity benefits qualify for the Virginia income tax subtraction for death benefits pursuant to Va. Code § 58.1-322 C 32.

The adjustment to disallow the subtraction for certain death benefit payments is thereby reversed, and your 2008 Virginia income tax return will be reprocessed.

The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.gov . If you should have any questions regarding this ruling, you may contact * in the Policy Development Division, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner