Loss on variable annuity

[jimmcg]

Client cashed in a non qualified variable annuity contract in 2005. Proceeds were less than adjusted basis in the contract. My recolection is that this loss is deductable as a misc. itemized deduction subject to the two percent of adjusted gross income limitation. I cannot find a specific reference to this in The Tax Book. Appreciate any input from other board members on this.
Thanks,
Jim

[Unregistered]

Look for misc itemized deductions not subject to 2%. There is a reference.

[jimmcg]

Thank you my friend for the quick reply. I was looking in the wrong place. I did not realize it was not subject to the two percent limitation.

[veritas]

TTB has a long dissertation on annuites staring on pg 22-5 through 22-9 but it fails to deal with an annuity distribution that is less than the investment. At least I didn't see it.

[jimmcg]

Thanks again!

[Bees Knees]

TTB, page 4-23 - its in the list under miscellaneous itemized deductions not subject to the 2% AGI limit.

[Unregistered]

I'm not necessarily saying I agree but the IRS position is that it would be a loss subject to the 2% rule (See publication 575)

Rev Ruling 61-201 clearly says the loss is ordinary. Where to put it is the question???
3 schools of thought
#1 Sch A - 2% rule
#2 Sch A - no 2% rule
#3 Aggressive - Form 4797 - ordinary loss

[Bees Knees]

The 2003 Edition 2002 Tax Year QF on page 14-17 makes clear whether a loss is subject to the 2% AGI limit or not.

A loss on the non-deductible basis in a traditional IRA is deductible as a miscellaneous itemized deduction, subject to the 2% AGI limit, provided all of the funds in all of the taxpayer’s traditional IRAs have been withdrawn. This same rule applies to Roth IRA losses if all of the funds in all of the taxpayer’s Roth IRAs have been withdrawn.

A loss on the after tax basis of a qualified retirement plan that is distributed in a lump sum distribution is deductible as a miscellaneous itemized deduction, subject to the 2% AGI limit.

If a taxpayer dies before his or her after tax investment in a qualified plan or annuity is distributed tax-free, then the unrecovered investment can be deducted on the taxpayer’s final return as a miscellaneous itemized deduction, NOT subject to the 2% AGI limitation.

A loss on the basis in a nonqualified “refund” annuity is treated the same as the loss on a lump sum distribution from a qualified retirement plan. The unrecovered cost basis is deductible as a miscellaneous itemized deduction subject to the 2% AGI limitation.

A loss on the basis in a nonqualified “nonrefundable” annuity is not deductible.

[Unregistered]

So are you saying TTB is wrong as enumerated in your prior post?

[Bees Knees]

No, TTB, page 4-23 says "deduction under Section 72(b)(3) for unrecovered investment in a pension or annuity contract" is NOT subject to the 2% AGI limitation.

I didn't look close enough to the question the first time. Section 72(b)(3) only applies to a taxpayer's final return - meaning you have to die before they will give you the deduction as not being subject to the 2% AGI limit.

[jimmcg]

Loss on Variable Annuity

Thanks to all who replied on this thread. It answered my question. I don't know about anyone else but I learned someting from the input.