2.94 Tax-sheltered annuities. (1) GENERAL. (a)

Payments for a tax-sheltered annuity purchased for an employee by a public school system or by an exempt educational, charitable or religious organization, which are excludable from the em- ployee[s gross income in the year of payment under section 403 (b) of the Internal Revenue Code, are also excludable in the year of payment for Wisconsin income tax purposes. Note: The exclusion from gross income as provided in sub. (1) (a) is effective January 1, 1965, when Wisconsin adopted the Internal Revenue Code as the basis for computing Wisconsin taxable income. Payments prior to January 1, 1965, were taxable for Wisconsin income tax purposes. (b) All benefits paid under tax sheltered annuity contracts, in- cluding withdrawals, death benefits or annuities, are included in federal taxable income when received. The Wisconsin treatment is described in subs. (2) and (3). (2) MILWAUKEE CITY AND COUNTY EMPLOYEE AND STATE TEACHERS RETIREMENT SYSTEMS. Normal retirement benefits re- ceived from systems enumerated in s. 71.05 (1) (a), Stats., are ex- empt as provided by that section. The exemption is limited to payments from the accounts of those persons who were members of any of the systems on December 31, 1963, or who were retired from any of the systems on or before December 31, 1963. How- ever, benefits received from tax-sheltered annuity deposits de- scribed in sub. (1) administered by these systems do not qualify for the exclusion from Wisconsin taxable income provided by s. 71.05 (1) (a), Stats. Tax-sheltered annuity benefits shall be in- cluded in gross income for Wisconsin income tax purposes as they are for federal income tax purposes, except as provided in sub. (3). (3) STATE TEACHERS RETIREMENT SYSTEM. (a) Tax-shel- tered annuity benefits received by retired teachers on and after January 1, 1974, shall be included in taxable income. No sub- traction modification from federal adjusted gross income may be allowed, except as provided in par. (b). (b) If a school system purchased a tax-sheltered annuity for an employee prior to January 1, 1965, and the employee paid a Wis- consin income tax on the tax-sheltered annuity deposit which was used to pay the 1964 annuity premium, a subtraction modifica- tion under s. 71.05 (6) (b) 3., Stats., shall be allowed for the tax- sheltered annuity benefits received on or after January 1, 1974, which are included in federal adjusted gross income and upon which the employee previously paid a Wisconsin income tax. The allowable subtraction modification is the amount of deposit on which the Wisconsin tax was previously paid less that portion, if any, of the tax-sheltered annuity benefits excludable from Wis- consin taxable income because of receipt prior to January 1, 1974. Examples: In each example below, assume the employee is a taxpayer who files tax returns on a calendar year basis. 1) An employee made a deposit of $200 for the purchase of a tax-sheltered annu- ity in 1964, and this amount was included in Wisconsin taxable income. When the employee retires after December 31, 1973, a subtraction modification under s. 71.05 (6) (b) 3., Stats., is permitted for the first $200 of tax-sheltered annuity benefits re- ceived. All subsequent benefits are taxable with no subtraction modification allowed. 2) An employee made a deposit of $300 for the purchase of a tax-sheltered annu- ity in 1964, and this amount was included in Wisconsin taxable income. The em- ployee retired prior to January 1, 1974, and $120 of the benefits received were not included in Wisconsin taxable income. A subtraction modification under s. 71.05 (6) (b) 3., Stats., is permitted for the next $180 ($300 - $120) received after Decem- ber 31, 1973. All subsequent benefits are taxable with no subtraction modification allowed. 3) An employee made a deposit of $160 for the purchase of a tax-sheltered annu- ity in 1964, and this amount was included in Wisconsin taxable income. The em- ployee retired prior to January 1, 1974, and treated $200 of the benefits as nontax- able for Wisconsin income tax purposes. All the benefits received after December 31, 1973, are taxable with no subtraction modification allowed. Note: Section Tax 2.94 interprets s. 71.05 (1) (a), Stats. History: Cr. Register, April, 1978, No. 268, eff. 5-1-78; r. (1) (a) and (3) (b), renum. (1) (b), (c) and (3) (c) to be (1) (a), (b) and (3) (b) and am. (a) and (3) (b), am. (2) and (3) (a), Register, June, 1991, No. 426, eff. 7-1-91.