Cash surrender annuity ?

[RWG1950]

My customer is a 95 year old widow in ill health. P/O/A daughter wants mom to surrender a NQ annuity of about $ 150k (mostly taxable) to pay LTC expenses.
She also has significant other capital assets that she could sell if she wanted to.
Mom's annual income runs about $ 80k or so. She'll have deductible 2019 LTC (medical) expenses of about $ 180K.
Running the numbers, it looks like she'll have little (if any) federal tax and possibly a small state tax if she cash surrenders the annuity in 2019.
Her future medicare "B" premiums would increase though with the extra income - although given her age & health this may not be much of a consideration.
Surrendering the annuity seems to be the thing to do.
Anyone see something I may be overlooking here ?
Thanks for comments.

[kathyc2]

I come up with about 10K of federal tax. 80K regular income plus 150K annuity is 230K. After 7.5% haircut medical deduction would be 167K, leaving taxable income of 63K. Of course, if the 80K regular income already includes a significant amount for scheduled annuity, the number would be difference. And she may have other itemized deductions in addition to medical.

Would there be any surrender charges for taking the total from annuity?

If the other capital assets are such that they would get a step up, it would not make sense to sell them to have Mom pay gain.

[Gene V]

I think Kathy calculation is pretty much on target--except medical haircut is 10% for 2019.

Also, I think with this income, Form 8960 will be triggered, (code 1411) which would be additional tax $1,140

I'm sure, when you get all the actual numbers, the taxes will be less.

[kathyc2]

Oops!. I was incorrectly thinking it stayed at 7.5% for the over 65 crowd.

[RWG1950]

Thanks much for your comments. Her regular income from 2018 was $75K (I had posted 80K)
The annuity is a 1969 issue so no surrender charges. Pre-1982 allows basis to come out first but it is very small. (it's had 50 years to grow)
Using 2018 software as a rough guide (+ $150K) I get $225K AGI, $167K "A", $58K TI, $8,387 Tax (using 7.5% & not counting whatever the basis is)
Could withdraw a lesser amount & go to no (or almost no) tax but the $150K seems to allow for getting rid of a lot of ordinary income (most at $0 tax) at a low marginal rate,
rather than using her capital assets. This was my main thought. Guess I'm just a little nervous in helping the customer make this call.

[kathyc2]

If it was me, I'd also run numbers for taking out between 100 and 125 this year instead of the full 150. Not knowing what type of income makes up the 75K (regular vs ltcg rates) I'm guessing there might be some tax savings in taking a big chunk out in 2019 and then the balance in early 2020 as opposed to the full amount in 2019.

[Burke]

Here is something else to consider. Annuities do NOT get a stepped up basis at death, so her beneficiaries will be paying the tax on this when that happens and the funds are distributed. Cashing in now (partially or fully) with her large tax deduction available might be an advantage as far as that scenario is concerned. Her other capital assets WOULD get stepped-up basis to the heirs, so no tax to them if they are sold immediately after death. Increased Medicare prems (IRRMA) will only come into play 2 years from now, so may not be an issue if she is no longer with us.