PURPOSE: This rule serves as a guideline in the determination of the amount of a taxpayer’s allowable modification with respect to any item of income or gain which was properly included in taxable income and taxed under the Missouri income tax law in effect prior to January 1, 1973.

Editor’s Note: The secretary of state has determined that the publication of this rule in its entirety would be unduly cumbersome or expensive. The entire text of the material referenced has been filed with the secretary of state. This material may be found at the Office of the Secretary of State or at the headquarters of the agency and is available to any interested person at a cost established by state law.

1. (1) General Rule. There shall be subtracted from federal adjusted gross income (FAGI), to the extent included in the adjusted gross income (AGI), any amount necessary to prevent the taxation under sections 143.011—143.996, RSMo of any item of income or gain properly included in the taxable income and taxed under the Missouri income tax law in effect prior to January 1, 1973. This modification applies to the income of a taxpayer even though the right to receive the income may have been acquired by reason of the death of a decedent or from an estate or trust.

2. (2) Annuity. An annuitant is permitted to deduct from FAGI the amount, if any, by which the total annuity payments previously taxed for Missouri tax purposes exceed the total annuity payments previously taxed for federal tax purposes. The reduction of FAGI representing the excess amount previously taxed by Missouri is limited during the taxable year to the amount of the income included in FAGI. The modification for each annuity must be computed separately.

   1. (A) Example: A calendar year taxpayer paid $20,000 for an annuity and began drawing $2,000 a year from that annuity in 1968 when s/he was seventy (70) years old. Assuming his/her life expectancy at that time was 12.1 years, his/her expected return 12 CSR 10-2

would be $24,200 and s/he would be taxed on 17.356% of his/her annuity for federal tax purposes. For Missouri tax purposes for all taxable years prior to January 1, 1973, s/he would be taxed on three percent (3%) of the amount paid for the annuity contract ($600). The modification required under section 143.121-3(c), RSMo would be computed as follows: Net Amount Federal Included in Taxable Missouri Missouri Year Amount Modification AGI 1968 $347.12 $600.00 1969 $347.12 $600.00 1970 $347.12 $600.00 1971 $347.12 $600.00 1972 $347.12 $600.00 1973 $347.12 $347.12 0 1974 $347.12 $347.12 0 1975 $347.12 $347.12 0 1976 $347.12 $223.04 $124.08 1977 and later $347.12 0 $347.12

1. (3) Modification for Income From Keogh (Self-Employed) Retirement Plan. A Keogh Act Retirement Plan qualified under Internal Revenue Code (IRC) Section 401 provides for a tax deduction for a self-employed individual for contributions to a qualified pension or profit-sharing plan. An owner-employee can contribute for him/herself each year a portion of his/her earned income for that year. For the years 1963—1967, only one-half (1/2) of a contribution on behalf of an owner-employee was deductible for federal tax purposes. Income earned on the contributions is not taxed until withdrawn from the retirement fund, at which time it is taxed as ordinary income. Under the Missouri income tax law in effect prior to January 1, 1973, contributions to a qualified retirement plan by a self-employed individual on his/her own behalf were not allowed as a deduction. A self-employed taxpayer receiving payments from a Keogh retirement plan is permitted to deduct from FAGI, to the extent included in the AGI, an amount equal to the difference between the sum of the contributions which were deductible for federal tax purposes and the sum of the contributions which were deductible for Missouri tax purposes.

   1. (A) Example: A taxpayer contributed $2,500 to a Keogh plan every year from 1963—1977 and receives the first of ten (10) equal annual payments of $7,000 in 1978. The modification required under section 143.121-3(c), RSMo would be computed as follows:

      Summary of Contributions Federal Missouri Contri- Allowable Allowable

Years butions Deductions Deductions 1963—1967 $12,500 $ 6,250 0 1968—1972 $12,500 $12,500 0 1973—1977 $12,500 $12,500 $12,500 $37,500 $31,250 $12,500 The difference between allowable federal deductions ($31,250) and allowable Missouri deductions ($12,500) is $18,750. This is the maximum amount which can be deducted as modifications for Missouri tax purposes.

Summary of Payments Received Net Amount Missouri Included in Total Portion Modi- Missouri Received Taxable fication AGI

1978 $ 7,000 $ 6,375 $ 6,375 0 1979 $ 7,000 $ 6,375 $ 6,375 0 1980 $ 7,000 $ 6,375 $ 6,000 $ 375 1981 $ 7,000 $ 6,375 0 $ 6,375 1982— 1987 $42,000 $38,250 0 $38,250 $70,000 $63,750 $18,750 $45,000

1. (4) Modification for Installment Sales. Where property which had a higher adjusted basis for Missouri tax purposes was sold on the installment basis prior to the effective date of sections 143.011—143.996, RSMo and the installment method of reporting the gain was properly used for both federal and Missouri tax purposes, a modification under section 143.121-3(c), RSMo is necessary to prevent the double taxation of that portion of the gain that does not exceed the difference in basis. The amount of the modification shall be limited to that portion of the modification as the amount received in the current year is to the total selling price.
2. (5) Tax Return Information Required. Any modification permitted under this section shall be fully explained and computations set forth in a statement attached to each Missouri tax return in which the modification is made. The taxpayer shall retain records as may be necessary to establish the amount of the modification.

AUTHORITY: section 143.961, RSMo (1986).* Regulation 1.121-3(c) was originally filed March 15, 1974, effective March 25, 1974.

*Original authority 1972.