Taxpayer took a total distribution from non-qualified annuity. His basis in the account was more than what he received in the final distribution. Can we deduct a loss ?
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Loss
I would use Sch D and deduct 3.000 a year for the loss. -
Loss on Non Qualified Annuity
You have not stated whether this is a Variable Annuity as opposed to a Fixed Annuity. So loss could be Variable Annuity, decline in market plus the Company surrender fee, or on the Fixed Annuity, the surrender penalty. The following is for the Variable Annuities, so might give you the answeralso another link on the subject which pretty much states the same http://www.fool.com/personal-finance...ty-losses.aspxAre Annuity Losses Deductible?
For a non-qualified annuity loss to be tax deductible, the loss must be realized by completely cashing out or surrendering the annuity. Exchanges using the 1035 tax provision will not qualify the loss for a tax deduction; however, the new contract can maintain the original cost basis. It's important to remember that any surrender charges that apply will not be deductible as part of the realized loss.
Example
Let's say that Matt purchased a non-qualified annuity three years ago for $50,000. Due to poor investment performance, his annuity is now worth $40,000 and has a surrender charge of $3,000. Despite the surrender charge, Matt decides to cash out his annuity and receives a check for $37,000. Even though Matt received a check for only $37,000, his actual realized loss on the annuity is only $10,000, since the surrender charge of $3,000 cannot be counted as part of the realized loss as per IRS standards. However, even if Matt is not 59.5 years old, he will not be subject to a 10% IRS early-withdrawal penalty because this penalty is only imposed on gains.
Now that we've determined that Matt incurred a $10,000 realized loss, where should it be reported? Accountants have recently adopted two approaches to the reporting of this realized loss: an aggressive approach and a somewhat more conservative one. The conservative approach is to include the loss as a miscellaneous itemized deduction on Schedule A, where only the part of the loss that exceeds 2% of your adjusted gross income can be reported in this case (this may also subject you to the alternative minimum tax [AMT]). The more aggressive approach would have you take the position that the loss could be considered an ordinary loss sustained during the taxable year while entering into a transaction for a profit. In this case, the loss would be entered on Line 14 "Other gains & losses" (Form 1040 of a federal tax return), and the full loss could be deducted (without AMT issues).
Conclusion
The IRS Revenue Ruling 61-201 provides a minimal amount of authority for the idea that annuity losses would be acceptable as an ordinary loss (aggressive approach), but the safe gamble is to claim it as a miscellaneous itemized deduction. Regrettably, the IRS has not given any firm guidelines as to the proper way to claim the loss. Most financial planners will take the position that an annuity loss is an ordinary loss directly reportable on the front of your federal tax form. However, it's usually best to let your tax accountant make the call, since this is undoubtedly a questionable area that could be challenged by the IRS.
I am not agressive so have always used the Sched A 2%, rather than ordinary loss.
SandyComment
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How does that work?
>>His basis in the account was more than what he received<<
How does that work? Did his basis go up, or the FMV go down, or profits just get eaten up in fees?Comment
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Could most of the above
T/P needs to have available the original cost of his investment, then some statements from the Company. If Variable, his original cost could have diminished with the fluctuation of market, so if market declined, so did his annuity. Then when he cashed out, the Company charged him additional "surrender" fees.
If Fixed Annuity, his basis should have increased with the earnings posted, then there would be a "surrender" fee.
SandyComment
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