Nonqualified Annuity (1099 R code 7D) and Illinois

[Ringers]

My client purchased an annuity with after-tax dollars from Prudential and received a payment on form 1099-R coded "7D."  My software (ProSeries) transferred the taxable amount of the payment to 1040 line 16.  On the IL 1040, however, it did not deduct this amount as being from "retirement income" which IL allows as a deduction.  The taxpayer later received a correction notice from Illinois stating that the amount of retirment income allowed as an Illinois deduction was understated by this amount.  I talked to an IL auditor and, after he conferred with a few other people at the office, stated that anything on Federal lines 15, 16, and 20b will always be allowed as Illinois retirement income subtractions.  This means that if you use after tax money to purchase an annuity, the interest received will be tax free in Illinois, while if you put the money into a CD, the interest would be fully taxable by Illinois.  I asked the auditor if this made sense, and his response was "that is why our state is in such sorry financial shape."  SMH

In looking on the Web, I find that ProSeries does not allow such payments as IL subtractions, but its partner Lacerte does allow them as IL subtractions.  I am just wondering how ATX and Drake would treat code 7D payments regarding states which allow retirement income to be exculded from taxation.

[jklcpa]

re: Drake - I don't have IL loaded to test, but it appears that Drake considers this taxable in Illinois and would not include this payout in the IL exclusions. Comments on Drake's forum said that in March of 2015 Drake made a change so that anything with Code D in box 7 is taxable in Illinois. Prior to that change, Drake included items with code D in the subtractions making it necessary to manually override the subtractions on IL.

Another comment by an EA regarding that programming change said he'd confirmed directly with IL DOR and with Drake Support that this nonqualified annuity income has always been taxable to Illinois, and that prior to 2014 Drake's program contained an error that caused this income to show up as nontaxable.

I've seen some comments out on the web where it was said that Illinois was going after taxpayers that try to exclude this. Other comments specifically said that Lacerte's default programming excludes payouts with code D and that there is a checkbox to indicate that the amount doesn't qualify for the exclusion. I don't have that program, just what I read.

 

 

[Ringers]

What you are saying makes perfect sense to me, Judy.  I couldn't believe that IL sent a correction notice explicitly including the nonqualified annuity in the deduction and that the group of auditors from IL that I spoke with all ageed that it would be excluded.  Proseries also has a checkbox which is automatically checked when code D is entered and must be manually overwritten in order to NOT exclude the income on the Illinois return.  The right way to do things isn't always the way that Illinois does them.

Thanks for the information about Drake and Lacerte from the other forums.