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Taxpayer and Spouse are filing joint federal and Massachusetts income tax returns.The taxpayer deceased in June 2021. They are both in their mid-seventies and the taxpayer was receiving an annuity payment every month which was reported on Form 1099-R with federal income taxes withheld. There were no state income taxes withheld as the income is not taxable in Massachusetts. Every year a portion of the annuity was excluded as it was a recovery of his cost. In 2021, the spouse started receiving a monthly check and received a Form 1099-R for the total she received for the year.
My question has to do with the unrecovered cost of the annuity after the death of the taxpayer. Can the spouse deduct any of this or does it never get recovered?
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From Pub 575:
If the retiree was reporting the annuity under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. The resulting tax-free amount will then remain fixed for the initial and future payments. Increases in the survivor annuity are fully taxable. See Pub. 939 for more information on the General Rule.
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Simplified Method was used since annuity start date of July 1, 2001.
