Income loss from a Variable Annuity Non-qualified funds
Client put in 825,000 in a Variable annuity now valued one year latter at $625,000. Could he surrender an use the $200,000 income loss to offset his annual income of $145,000 and sell off some positions with losses to use up the balance? Can the income loss be carried forward if not used up in one year? Probably to late for the 2008 tax year to get the surrender done but 2009 will bring similar results. Please advise.
Permalink Submitted by Al Fry on Fri, 2008-12-26 16:28
Tread lightly here. Most VAs have gurantees with them that would be lost with a surrender. Plus any deduction that large would more than likely trigger an audit. For information, see IRS Publication 575. The deduction is misc., subject to the 2% floor.
Permalink Submitted by Roy Williams on Sat, 2008-12-27 02:12
Page twenty of the above states “Show the loss as miscellaneous deduction subject to the 2%-of-adujusted-gross-income limit. Does that mean you can only deduct the loss up to 2% of income or only losses that exceede 2% of income are deductible. Obviously I am not a tax professional. But clarification would be nice! This post is in response to the reply I received from alfry.
Permalink Submitted by Al Fry on Sat, 2008-12-27 02:37
If you look at Schedule A, you’ll see that it is the amount in excess of the 2%.
Permalink Submitted by Alan Spross on Sat, 2008-12-27 05:00
Note that the 2% applies to several different classes of misc itemized deductions in total, not separately to each deduction. Therefore, some of that 2% may already be used for some of those items. See Pub 529 for a list of misc itemized deductions subject to the 2% of AGI limit.
And of course, you must have total itemized deductions in excess of your standard deduction, or this deduction will not be able to be used.
As Al indicated previously, some of these annuities have a combination of fringe benefits that are of varied use, but all should be assessed carefully before you surrender the annuity. There will also be heavy surrender charges in many cases with surrender so soon after issue.
Permalink Submitted by Al Fry on Sat, 2008-12-27 05:20
Also, Pub 529 will say annuity losses are NOT subject to the 2% floor, however thay are talking about claiming a loss after death of owner, not a surrender while owner is still alive, which is covered in Pub 575. I will credit Alan for pointing that out some time ago, in a different post.