Decedent’s Unrecovered Pension Investment
A decedent's unrecovered pension investment is the amount of a pension or annuity that has not been paid out upon a recipient's death. In these situations, specific IRS tax rules apply. These regulations are detailed in this TaxBuzz Guide.
If a person dies before recovering the entire basis in a pension or annuity that started after 1986, the unrecovered portion is allowed as a Tier 1 (not subject to the 2% of AGI adjustment) miscellaneous itemized deduction on the individual’s final income tax return. (Code Sec. 67(b)(10); Code Sec. 72(b)(3)(A))
Thus, if the annuity is for the joint lives of an individual and a designated beneficiary, the deduction would apply to the final return of the last to die. Otherwise, it would be allowed on the decedent’s final individual return.
Example - Bill Smith, age 65, began receiving retirement benefits in 2022 under a joint and survivor annuity. Bill’s annuity starting date is January 1, 2022. The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Bill had contributed $31,000 (post-tax) to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill’s death.
-
Under the simplified method, Bill’s tax-free monthly amount is $100 ($31,000 ÷ 310). Upon Bill’s death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die.