Question

Colorado pension and annuity

Forum|Forum|5 years ago
February 19, 2021
1 reply
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We received a cash distribution for a life insurance policy. Does the taxable amount in box 2a qualify for the Colorado pension and annuity exclusion?

LenaH

Yes. Per the State of Colorado, if you are younger than 55 years old and you received pension/annuity income as a secondary beneficiary (widow, dependent child, etc.) due to the death of the person who earned the pension/annuity, then you are entitled to subtract $20,000 or the total amount of your secondary beneficiary taxable pension/annuity income, whichever is smaller.

If you need additional information please see Income 25.

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J

JohnymarkAuthor

That did not answer the question. We had a life insurance policy on my wife with a cash value. We cashed in the policy to get the cash. No one died. We are both over 60. We understand there is an exclusion for annuities and pensions. However, nowhere does it mention receiving cash from a life insurance policy that is surrendered early. The 1099-R we received from the insurance company, has the code D7 in box 7, the distribution code box.

T

ToddL99

If you cashed out a life insurance policy, only the interest earned on the cash value would be taxable. The cash value itself wouldn't be subject to federal or state tax, and you should have gotten a 1099-INT for the interest amount of the cash-out.

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When you take a withdrawal (or all) from the cash value of your life insurance, you won't pay any income taxes as long as the amount you cash out doesn't exceed the amount you've paid into the policy in premiums, also known as your basis. However, if you withdraw more than your basis and dip into your earnings, you pay taxes on the earnings portion of your cash out. For example, say you've paid in $22,000 in premiums over the years and the cash value of your account is $29,000. The first $22,000 you take out is tax-free, but the last $7,000 counts as taxable income.

The 1099-R distribution code (D7) indicates you took a distribution from a nonqualified annuity. That payment may qualify for the CO pension and annuity subtraction. See the following table from Income 25.