Categorization of annuity distributions

Question

Categorization question:

I have an non-qualified annuity that I've recorded as an investment account in Quicken, using multiple underlying security names with share numbers and prices. I recently started taking monthly distributions from this account, in such a way that part of the distribution is considered return of principle (not taxed)  and the rest is subject to income tax. So each month I record the sale of shares from each security, such that the total distribution amount is reflected in the Quicken account cash balance.

Problem: When the annuity company deposits the distribution (less tax withholding) into my checking account, this is essentially recorded as a transfer of funds from my Quicken annuity account into my Quicken checking account.  But how (and where) do I categorize a portion of this transfer as taxable income for reporting purposes? It's not really "new" income, it's just recharacterizing part of an existing "asset" as taxable income for the period.

One possibility I see is to record a portion of the annuity account cash withdrawal to a "dummy" expense category (to be later ignored), and then record the matching addition of cash to my checking account with an income category, to balance the asset totals.

JohnMRinehart · Answer

Thanks, NotACPA. I think this will work to handle the non-taxable portion of the annuity distribution. I'm including two more lines on the split transfer transaction:

One is an income category that I've called "Taxable distribution", set to, obviously, the taxable portion, and used for later income/tax reporting. The other is a "dummy" expense category, set to the NEGATIVE of the taxable distribution, just to balance the split, and ignored in most later reporting. If I run an Income/Expense report and include both of these categories, they will cancel and not contribute to net income.

The non-taxable portion of the annuity distribution is not specifically entered in this scheme - it's just the difference of the taxable portion from the total distribution, but I don't think I'll be needing that specific number for any reporting. It's basically just a transfer of funds from the annuity to the checking acct.

NotACPA · Answer

In Q, is the annuity account itself set up as taxable, or not?  From your description, I'm thinking non-taxable, but I wanted to double-check.  The rest of my reply assumes non-taxable and that "Transfers Out" are set as being taxable, using an appropriate tax line.

In Q you can't record a tax action in a non-taxable account, so those tax withholdings must be recorded in your checking  account.

For my withdrawals from my IRA (I'm subject to Required Minimum Distributions), I sell securities and transfer the total amount of the sale to my checking account. Then I split the transaction and leave the total amount on the 1st line  of the split and the taxes w/h as a NEGATIVE amount on the 2nd line. I then click the Adjust button so that the deposit into checking only shows as the Net/actual deposit.

I'm still noodling about the "return of capital" portion of your situation .. but 1st thought is that you'd need another transaction, which would net to $0, where you'd split the txn to reduce the Taxable income caused by the transfer out and an RtrnCap the net the txn.