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    WallyHelps's Avatar
    WallyHelps Posts: 1,011, Reputation: 136
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    #1

    Mar 9, 2018, 05:58 AM
    Tax treatment of my surrendered annuity
    Several years ago I bought a variable annuity based on the advice of my financial advisor. Unfortunately, this did not do well, and a number of years (and a new advisor) later, this annuity was 1035-transferred to a new company for lower expenses and investment options more in line with my other investments.

    Since annuities are an expensive product, and not for everyone, my current advisor recommended surrendering the contract, taking the hit on surrender charges, and moving on. I agreed to do so.

    Now, I'm trying to file my taxes and have some confusion. Disregarding the non-deductible surrender charges, the actual contract was surrendered at a substantial loss. To me that would seem to be deductible in some fashion. But where?

    I've read somewhere that in order to be deductible, the contract must be surrendered to the original company and not involved in a 1035-exchange. To me this does not make sense because I still suffered the same loss regardless of the company at the end.

    I have a 1099 from the second company that has my correct proceeds and (much higher) cost basis, but it is unclear how to file. Turbo Tax seems to make it non-taxable income, but does not account for the significant loss.

    What am I missing here?

    Thanks for any advice.
    WallyH
    ebaines's Avatar
    ebaines Posts: 12,130, Reputation: 1307
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    #2

    Mar 9, 2018, 06:27 AM
    Unfortunately you cannot deduct this as an investment loss, because annuities are considered to be personal property, since they are a form of insurance, and losses on the sale of personal property are not deductible. (Side note: if you had sold the contract at a gain you would have to report that as income.). This is one of the details that people who sell annuities typically don’t mention, and another reason why in general buying variable annuities is a bad idea for most people. You’re not alone - I made the same mistake about 15 years ago, sold my annuity contract for a loss, and learned the unfortunate truth. Needless to say I have not used the so-called “advisor” who sold me that awful thing ever again.

    As for reporting using TurboTax - you can override the cost basis that the program populates in schedule D so that the gain (loss) is zero.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,753, Reputation: 846
    Senior Tax Expert
     
    #3

    Mar 9, 2018, 08:30 AM
    What ebaines says is correct. That is why, when I do the occasional financial planning gig, I steer my clients AWAY from annuities.
    WallyHelps's Avatar
    WallyHelps Posts: 1,011, Reputation: 136
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    #4

    Mar 10, 2018, 10:52 AM
    Thanks for your answers. However, there seems to be some evidence that such a loss is deductible (http://capitalstrategies.net/wp-cont...5/03/10_06.pdf) and that adds to my confusion. I'll certainly steer clear of annuities in the future.

    WallyH
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,753, Reputation: 846
    Senior Tax Expert
     
    #5

    Mar 10, 2018, 06:39 PM
    Your link provides interesting reading (if you are a tax guy), but I generally agree with ebaines that your situation is one of personal property and thus NOT deductible.

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