The Annuity method is the program’s default method of applying the Section 691(c) Deduction. Using the estate tax that is attributable to the Retirement Plan, the program calculates the value of the Section 691(c) Deduction. Next, it divides the Section 691(c) Deduction by the Retirement Plan Ending Value to arrive at a deduction ratio. By multiplying the annual distribution by the deduction ratio, the program calculates an annual deduction. Each year, the program subtracts the annual deduction from the heir’s distribution, and the heir pays tax on the remaining amount of his or her distribution. The annual deduction reduces the remainder of the Section 691(c) Deduction each year until it is totally consumed.
Here’s how the Annuity Method calculates the amount of Section 691(c) Deduction used each year:
- Section 691(c) Deduction = Estate Tax on Retirement Plan
- Deduction Ratio = Section 691(c) Deduction / Retirement Plan Ending Value
- Annual Deduction = Annual Distribution * Deduction Ratio
- Taxable Amount of Annual Distribution = Annual Distribution – Annual Deduction
- Remainder of Section 691(c) Deduction = Section 691(c) Deduction – Annual Deduction
To see how the program applies the Section 691(c) Deduction, go to the Reports section, click the Analysis tab, and view the Taxable Amount of Retirement Plan Report.
