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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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I have surrenderd a non qualified deferred annuity. They are

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I have surrenderd a non qualified deferred annuity. They are sending me the checks at which point I will turn them into a non-qualified immediate annuity. I was told that I should have 1035 exchanged this money to avoid immediate tax consequences. However, I didn't do this. At the same time I know that I have suffered losses in this annuity that I have surrender. I have all the old statements, with my initial premium paid, withdrawals taken out, and I know there is still a loss. Since I didn't 1035 exchange it I want to make sure that my records will be adequate for the IRS in making sure that I don't have to pay tax on this money at tax time in 2009. Can you help?
Submitted: 5 years ago.
Category: Tax
Expert:  jgordosea replied 5 years ago.
Greetings,

In addition to your records, you should have gotten (or could get) a statement or list of transactions on the annuity from the company.

If indeed the amounts invested are less than all of the withdrawals from the account then you would have a loss on the investment that you could claim on your income tax return.
Any surrender charges that apply will not be deductible as part of the realized loss. The surrender charge can be used as an investment expense.
You can include the loss as a miscellaneous itemized deduction on Schedule A, but only the part of the loss that exceeds 2% of your adjusted gross income will result in a deduction.

If your total contributions are less than your total withdrawals for the contract (not including the surrender charge) you do have income subject to the income tax for the difference. The surrender charge can still be used as an investment expense on Schedule A.

There is, of course, no way to guarantee that any amount of documentation will or will not satisfy an Internal Revenue Service examiner. But, if you have the complete list of transactions on the account then that is all that you can possibly have.

I hope this helps for reporting the surrender of the nonqualified deferred annuity.

Best regards.
Customer: replied 5 years ago.

I'm a bit confused. You said, if indeed the amounts invested are less than all of the withdrawals from the account then you would have a loss on the investment.

 

That sounds like a gain to me. If I put in 50,000, but pulled out 51,000 (withdrawals & surrender), that would be a gain of a 1,000 wouldn't it?

 

 

Expert:  jgordosea replied 5 years ago.
Hello again,

Sorry, I did misstate that - it should have said "If indeed the amounts invested are MORE than all of the withdrawals from the account then you would have a loss"

As you see I later did address the gain situation when I wrote: "If your total contributions are less than your total withdrawals for the contract (not including the surrender charge) you do have income subject to the income tax for the difference."

Please excuse any inconvenience for the misstatement and let me know if you need any other clarification.
Thank you.
Customer: replied 5 years ago.

That helps :-).

 

Here are the numbers:

Initial Premium: 123,271 April 2004 (Non-qualified money)--It was 1035 exchanged into a deffered annuity.

 

Withdrawals 6,163

Cost basis left 117,108 (123,271 - 6,163)

Surrender Money Received: 105,365 (August 2009)

Loss of 11,743 (117,108 - 105,365).

 

The 105,365 will go immediately into an immediate annuity (non-qualified). My concern, will I have to pay tax on the 105,365 that we received in surrender charges, or is there a way to not have to pay any tax on this at all until the immediate annuity starts to pay out beyond the cost basis of 105,365. I am wondering if the only way to do this is with the 1035 exchange that should have taken place, but didn't.

 

I know this is complicated, I will compensate you fairly if you can bring clarity to the issue.

Expert:  jgordosea replied 5 years ago.
We also need the surrender charge amount as that is not used when figuring your gain or loss.

That is, the surrender charge will be added to the check amount (105,365?) as the amount realized.

Or does the 105,365 already include the check plus the surrender charges?

Thanks.
Customer: replied 5 years ago.

The money came from a fixed index annuity so there was no interested credited to the annuity. I don't know what the surrender charge was, I only know what the check amounts were that were sent to me after the surrender.

 

 

Expert:  jgordosea replied 5 years ago.
Hello again,

Your gain or loss is = your return- your basis = (6,163 + 105,365 + surrender charge)- 123,721.

You will need to get the amount the company kept in surrender charges to know what your gain or loss actually was.

For example, if you had to pay 10,000 to surrender then your loss is (6163 + 105365 + 10000)-123721 = 121528 - 123721 = -2,193

Please remember that the surrender charge is an investment expense to be used as a deduction.

I hope this helps so you can make the computation and reporting when you have all of the information.



jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3013
Experience: I've prepared all types of taxes since 1987.
jgordosea and other Tax Specialists are ready to help you
Customer: replied 5 years ago.

That makes sense.

 

However, even after all the figuring it looks like some tax would be due on the money.

 

Thanks for the time on this issue.

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