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By Mark Stone, CPA, CFP, MS
Yohalem Gillman & Co., LLP

Every New York tax practitioner knows about the $20,000 annual tax exclusion that offsets taxable distributions from an annuity or retirement plan. A retirement plan includes individual retirement accounts, self-employed retirement plans (SEPS, SIMPLE, and Keoghs), and all qualified plans pursuant to the Internal Revenue Code. The question that often arises, is whether the exclusion can be availed of upon death of the pensioner or annuitant.

General Exclusion Rule

The maximum exclusion allowed for any New York resident can never exceed $20,000 per year. For a married couple, each resident spouse who qualifies for the exclusion independently is eligible to subtract up to $20,000 from his or her income. However, neither spouse can claim any unused part of the other spouse's exclusion.

The $20,000 exclusion is offset against the combined income received from all disability, annuity, and pension income. To qualify as pension or annuity income, the taxpayer has to be 591Ž2 before January 1 and the pension and annuity income must 1) be included in the taxpayer's Federal adjusted gross income,
2) be derived from services performed as an employee before retirement or from retirement plan contributions that are deductible under Federal income tax law, and 3) be received in periodic payments. The periodic payment requirement does not apply to Keogh and IRA plans. For these plans, the exclusion is available for lump-sum distributions except for those using either the five- or ten-year lump sum averaging method or the 20% capital gain election (both found on Federal tax form 4972) to compute taxes.

For New York nonresident taxpayers, pension annuities received from New York related employment have never been subject to New York income taxes. While pension annuities are not taxable, other retirement plans including IRAs and Keogh distributions have always been subject to New York income taxes, against which the $20,000 exclusion is available. When the president signed the Pension Income Taxation Limits Act at the end of 1995, it prohibited any state from taxing retirement income of a nonresident of that state after December 31, 1995. As such, the tax ramifications of this exclusion only relate to New York resident taxpayers and descendants.

Beneficiary Exclusion Allowed

Upon death of the pensioner or annuitant ("the decedent"), the beneficiary can use the exclusion for the decedent's future pension distributions. If the decedent's pension or annuity income would have qualified for the exclusion prior to death, then the exclusion can be utilized under New York Tax Law section 612(c)(3-a). In this case, the beneficiary must be either an individual or a trust created by the decedent. There is no age requirement that must be met by the beneficiary to exclude this income. It must be noted that a beneficiary receiving a distribution is entitled to only one $20,000 exclusion.

Example: Jack receives $15,000 annual pension income. Jack's wife, Jill, receives $17,000 annual pension income. In any one year, the combined $32,000 of qualified pension income is excluded from New York taxes. Jack dies naming his wife Jill as the pension beneficiary of $5,000 annually, and his 18-year-old son, Jon, as the remainder beneficiary. In this case, Jill's exclusion will be limited to the $20,000 annual exclusion for her total pension income of $22,000; Jon will exclude the entire $10,000 received.

Exclusion Allocation

If the deceased has more than one beneficiary, does each beneficiary qualify for the $20,000 pension and annuity income? Since the annual exclusion belongs to the pensioner or annuitant, a distribution to multiple beneficiaries upon death does not multiply the exclusion. The $20,000 annual exclusion to which the decedent was entitled is allocated among the beneficiaries in the same ratio as the distributions. This allocation works as follows: a decedent leaves $15,000 of $30,000
total pension income to his son. His
son can exclude $10,000 ($15,000 received/$30,000 total pension = 50% x $20,000 annual exclusion) of the $15,000 received from New York income taxes.

State and Local Editor:
Marshall L. Fineman, CPA
David Berdon & Co. LLP

Interstate Editor:
Stuart A. Rosenblatt, CPA
Wiss & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
M. R. Weiser & Co. LLP

Leonard DiMeglio, CPA
Coopers & Lybrand LLP

Steven M. Kaplan, CPA
Konigsberg Wolf & Co., PC

John J. Fielding, CPA
Price Waterhouse LLP

Warren Weinstock, CPA
Paneth Haber & Zimmerman LLP

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices

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