Non-Qualified Annuity

Submitted by Dean Strom on Mon, 2020-01-20 20:21

I realize that this is an IRA discussion forum, but, in this case, my client’s non-qualified annuity was set up for retirement, and I’m hoping that someone can point me in the right direction.

I have a client who I assumed that has a non-qualified variable annuity that is worth about $30,000 less than what they started with. There have been no withdrawals and there are no living benefit features on this annuity that would be taken into consideration.

Can the client liquidate the annuity and realize the loss and carry that on to their income tax return? And if so, are there any potential pitfalls or rules that I should be aware of?

Thanks in advance for your help.



Submitted by Alan - IRA critic on Mon, 2020-01-20 23:45

Client can surrender the annuity for the cash value, but misc deductions subject to the 2% AGI floor have been suspended through 2025. Therefore, the loss cannot be claimed as an itemized deduction. The 1099R will show no taxable gain in Box 2a, but will not show a loss. In the past some people have taken a super aggressive stance and claimed such losses as ordinary losses on the former line 21 of Form 1040. This approach will probably be rejected by the IRS.

Submitted by David Mertz on Tue, 2020-01-21 00:54

I think that claiming these losses by way of including them as a negative amount of miscellaneous income might have been permissible prior to the establishment of section 67 of the tax code effective for tax years beginning after 1986, but since section 67 was introduced and explicitly includes nonrecoverable basis in the list of items to which it applies, I don’t think it’s permissible any longer.  This miscellaneous deduction has been suspended through 2025, but that does not change the fact that this deduction item is still covered by section 67.  Those who take the aggressive approach were probably doing it that way prior to 1987 and seem to be ignoring the fact that the addition of section 67 makes this impermissible.

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