claiming a loss on a variable annuity
I understand that if a variable annuity is cashed out / surrendered, the owner can deduct the loss as a misc. itemized deduction subject to the 2% floor.
My question is: can that loss be carried forward? Suppose someone has income of $30,000 but the loss on the annuity is $50,000 (and other deductions are an additional $10,000). So income and thus taxes in the year of cashing out will be zero.
Can this person carry forward the additional ~$30,000 loss on the VA for future years, or is it lost?
Permalink Submitted by Alan Spross on Thu, 2009-04-16 21:54
There is no carryover, and the unused deduction would be lost. However, this also presents good opportunity to convert to a Roth IRA to fully use the deduction. 2% of the conversion would be added to the prior 2% floor, but that’s a minor issue except with higher incomes. With higher incomes, loss of the deduction to AMT could also become a factor.
Permalink Submitted by Al Fry on Mon, 2009-04-20 15:23
Assuming this is a NQ annuity, one could do a partial exchange into another low surrender charge annuity of, say 50%. Everything goes over pro-rata. Then, after 12 months surrender the original annuity (assuming the loss will be just as valuable next year). If the surrender is done within 12 months, the 1035 exchange will be negated (as per an IRS ruling in 2008).
Permalink Submitted by Alan Spross on Mon, 2009-04-20 22:22
Al,
With half the basis going to the new annuity, wouldn’t you only get half the loss by cashing in the original annuity after 12 months?
Permalink Submitted by Al Fry on Tue, 2009-04-21 20:40
Alan – Correct, but then he would not lose the other half. When the mnarket recovers, he could get that much gain in the B annuity without taxation upon later surrender.
Permalink Submitted by Joseph Arsenault on Tue, 2009-04-21 21:00
You could be more aggressive and take the deduction on the face of the 1040 using the 4797. Most cite Rev Rul 61-201 to handle losses on annuities that were used for the purpose of making a profit. Tax practitioners have seemed to have success in this area even though the IRS has tried to reiterate the use of the 2% misc deduction for the losses. As long as the owner is the annuitant and the annuity is fully distributed this may be option. Furthermore it may qualifiy as a NOL carryfoward, depends on how you interpret it..