L&HIllinoismedium
A 55-year-old Illinois annuity owner takes a $20,000 taxable distribution from a non-qualified deferred annuity. Which statement most accurately reflects Illinois treatment of the early-withdrawal penalty?
A 10% federal early-withdrawal penalty applies on the taxable gain; Illinois imposes no additional state surtax on the early withdrawal
BIllinois imposes a 5% state penalty in addition to the federal 10%
CIllinois exempts the entire distribution from federal tax through a state credit
DNo federal penalty applies because the owner is past age 50
Why this is the answer
IRC § 72(q) imposes a 10% additional federal income tax on the taxable portion of an annuity distribution received before the owner attains age 59½, unless an exception (death, disability, substantially equal periodic payments) applies. The taxable gain is determined under the LIFO ordering rule applicable to non-qualified annuities. Illinois does not impose a separate state-level surtax on top of the federal 10%. The age threshold is 59½, not 50, so the 55-year-old is subject to the penalty.
Studying for the Illinois Life & Health exam?
This question comes from our L&H bank. Take a free practice test — no signup.