My client has a $21k loss on her life insurance policy ($19k cash value, $40k cost basis). She doesn’t want the life insurance anymore. If she surrender’s the policy, that loss is not deductible. But back in 2009 when I was a wholesaler, I saw another financial advisor 1035 his client’s life insurance policy into a liquid NQ annuity with the intent to surrender it 1 year and 1 day later so the client could deduct the loss.

I never forgot this very creative strategy.

If my client decides to 1035 into an annuity with the intent to liquidate it later, how can she deduct the loss? I’m reading things about the more conservative strategy is the 2% miscellaneous deductions rule, but I thought this went away with the TCJA of 2018. I’m also reading that a more aggressive (risky) strategy is to offset capital gains. Can anyone comment on what our tax deductible options are?