Client surrendered a commercially-offered tax deferred annuity (which he purchased with after-tax dollars) from a well-known national insurance company some years ago. His 1099R shows the entire amount as taxable income. When contacted for an explanation for this and a corrected 1099R showing his basis in the contract, he was informed that the "IRS required" them to show the entire amount as taxable. Reason = he has another tax-deferred annuity contract (same kind) still with the company, that has earnings and basis. Company says they must "aggregate" all annuities together, and report as taxable everything received up to 100% of earnings in all contracts, not just the one he is now surrendering. They say when he cashes in the other one, all basis in both contracts will be allocated to the next one. If the other annuity was with another company, how would they know what earnings he might have? I told client to call back and have them give the cite or reg or code where this is so. Any opinions?
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Last edited by Burke; 02-12-2009, 06:03 PM. -
Thought I would update board on this question. I found the answer. It is true. I guess I had never run into anyone that had more than one TDA annuity with the same company but there it is right in the tax code. Under Anti-Abuse Rules: Section 72(e)(11)(ii):
"all annuity contracts issued by the same company to the same policyholder during any calendar year shall be treated as 1 annuity contract." Same applies to modified endowment contracts. (Certain exceptions are 403(a), 403(b), IRA's.)
What a surprise to TP who was not advised of this by the insurance company before he surrendered the first policy. So he has to report all the investment earnings in both contracts (up to the amount he received) in 2008, when he won't cash in the remaining contract until 2009. And he has to wait an entire year to claim his basis on the next distribution.
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