1099-R Code F: Basis, Capital Gain, and Ordinary Income

Distribution Code F in Box 7 of a Form 1099-R means the payment came from a charitable gift annuity. The charity that issued your annuity contract sends the form to report your annual payments, and because the money isn’t coming from a retirement plan or IRA, the 10% early withdrawal penalty doesn’t apply at any age.

What Code F Tells You About the Payment

Code F is specific: it marks distributions under a charitable gift annuity contract, where you transferred cash or property to a nonprofit in exchange for fixed lifetime payments. The charity is the payer on the form, not a plan administrator or IRA custodian.

Code F also stands alone in Box 7. Unlike some distribution codes that pair with a second code, Code F has no allowable combinations.¹ If you see another code sitting next to it, the form likely has an error, and you should ask the charity for a corrected version before filing.

How the Payment Is Split for Taxes

Each payment you receive isn’t taxed as one lump. Under federal tax law, a single annuity payment can be split into as many as three pieces, and each piece is treated differently.² The charity does the math and reports the results on the 1099-R.

Tax-Free Return of Basis

Part of each payment is a tax-free return of your original contribution. The IRS calls this the exclusion ratio, and it’s locked in when the annuity is created. The ratio equals your investment in the contract divided by the expected total return over your life expectancy, and the resulting percentage of each payment comes back to you tax-free.²

This tax-free treatment runs only until you’ve recovered your entire basis. After that point, every dollar of every payment is ordinary income for the rest of your life.² The payment amount stays the same, but the tax bill jumps. That transition catches people off guard.

Capital Gain if You Funded With Appreciated Property

If you funded the annuity with property that had appreciated in value, part of each payment is treated as long-term capital gain rather than ordinary income. The gain is spread across your life expectancy instead of recognized all at once, and the amount for the year appears in Box 3. Once the total capital gain has been fully reported over the years, that component drops away, and the remaining payments consist only of ordinary income and whatever basis return still remains.

Ordinary Income

Whatever isn’t a basis return or capital gain is ordinary income, taxed at your regular rates. On your 1099-R, the taxable amount shows up in Box 2a and the nontaxable return of basis in Box 5.

Where the Numbers Go on Your Return

The gross distribution in Box 1 goes on Form 1040 line 5a (pensions and annuities), and the taxable amount from Box 2a goes on line 5b.³

If Box 3 shows a capital gain amount, that figure is reported separately on Schedule D so it gets the long-term capital gains rate instead of being taxed as ordinary income. Skipping this step means the capital gain gets taxed at ordinary rates and you overpay.

Hold on to the paperwork from when the annuity was established, especially the exclusion ratio calculation and any charitable deduction documentation. If the IRS questions the tax-free portion of your payments years later, those documents are your proof. The charity should recalculate the breakdown each year, but mistakes happen, and the original numbers help you catch them.

If a CGA Was Funded With IRA Money

Starting in 2024, donors age 70½ and older can use a qualified charitable distribution from an IRA to fund a charitable gift annuity. This one-time election, created by SECURE Act 2.0, moves money directly from the IRA to the CGA without the distribution counting as taxable income. For 2026, the maximum amount is $55,000.⁴

The rules are strict: once in a lifetime, the annuity must pay at least 5%, deferred-payment annuities aren’t allowed, and only you, your spouse, or both can be named as annuitants.⁵ A CGA funded this way still generates a 1099-R with Code F, but the tax treatment of the payments is different. Because the original transfer was pre-tax IRA money, you have no after-tax basis to recover, so the entire annuity payment is ordinary income.

If the Annuitant Dies Before Recovering Basis

Payments are fixed, and life expectancy is just an estimate. Some annuitants pass away before receiving back their full investment. Federal tax law accounts for this: the unrecovered basis is allowed as a deduction on the annuitant’s final tax return.⁶ The code treats the deduction as if it were from a trade or business, which means it can create or contribute to a net operating loss that benefits the estate. Whoever prepares the final return should check whether basis remained unrecovered.

Common Mistakes and Penalties

The IRS specifically flags unreported 1099 income as an example of negligence. Leaving Code F income off a return or misreporting the taxable portion exposes you to an accuracy-related penalty of 20% of the underpaid tax, plus interest from the original due date.⁷

The more common error isn’t ignoring the form but mishandling the components. Reporting the full Box 1 amount as taxable when Box 2a shows a smaller figure means you overpay. Failing to put Box 3 capital gains on Schedule D means that income gets taxed at ordinary rates instead of the lower capital gains rate. Neither mistake triggers a penalty, but both cost you money unnecessarily.

When the Form Should Arrive

Charities must send the 1099-R by January 31 following the tax year the payments were made. If that date falls on a weekend, the deadline shifts to the next business day, so most recipients have the form by early February. If it hasn’t arrived by mid-February, contact the charity directly. The IRS receives its copy on a separate timeline and will expect matching numbers on your return.

1
Internal Revenue Service. Instructions for Forms 1099-R and 5498
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Publication 575 – Pension and Annuity Income
4
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
5
American Council on Gift Annuities. SECURE ACT 2.0 – Closing Gifts With IRA QCDs
6
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section 72(b)(3)
7
Internal Revenue Service. Accuracy-Related Penalty