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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 379
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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My elderly mother recently received an out-of-court payment

Customer Question

My elderly mother recently received an out-of-court payment from 3 large financial corporations whose agent had twisted her annuity accounts and coaxed various other transactions that benefited the agent quite a bit, but cost my mom a lot. The settlement was for about 3/4 of this and that included the lawyer's hourly charges, as well. We can show the capital losses and that they are less than the settlement. Are these taxable?
Submitted: 12 months ago.
Category: Tax
Expert:  taxmanrog replied 12 months ago.
Hi! Welcome to Just Answers! I am sorry to hear about your mom's situation. I have a client who went through something similar. The NASD has an "appropriate investment" standard that some brokers just don't follow!

In order to answer your question, I need to know what kind of annuity was involved. Was it an after-tax investment (i.e., she just took money out of her checking account to purchase it) or was it a rollover from an IRA or other retirement plan? It makes a difference!

Thanks! I look forward to your reply!

Roger
Customer: replied 12 months ago.

Nearly all are non-qualified annuities. It was money my Dad had saved and I'm pretty sure they were not ever in IRAs, 401Ks, etc.

Expert:  taxmanrog replied 12 months ago.

Ok. That makes a big difference. Legal settlements follow the course of the underlying transaction. The recent mutual fund legal settlements involved inside trading with the assets in the fund. These generate capital gains, so the settlements that people have received over the past couple years are capital in nature.

 

In your case, annuities generate ordinary income. When you write off a loss on a variable annuity, you will take a deduction on your tax return for any losses you experience in connection with the investment portion of your annuity. You cannot write off fees and other expenses associated with the annuity, such as surrender charges. You must take the deduction on Schedule A of your tax return as a "miscellaneous itemized deduction." Only amounts in excess of 2 percent of your adjusted gross income qualify for the deduction.

 

Your "basis" in the annuity is your investment, less any withdrawals taken.


Here is a good article to read: http://www.ehow.com/info_7869251_can-off-loss-nonqualified-annuity.html#ixzz2aiqrZkQB

 

I hope I have answered your question. If you have any more, please feel free to ask away! If I feel that my answer has helped you, please rate me highly! I would appreciate it!

 

Again, thanks for the question! Have a great day!

 

Roger

 

 

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 379
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and 8 other Tax Specialists are ready to help you
Customer: replied 12 months ago.

Hi, Roger:

 

I think this isn't going to be too helpful. Am I missing something?

 

My mother's biggest losses were from:

1. Her advisor recommending she close annuities and open new ones (twisting or churning?) - resulting in early w/d penalties to reimburse the corp[oration for the agent's huge commission - something that can't be written off on her taxes, if I understand the article you linked to; and,

 

2. Encouraging this then-76-year-old retired lady on a fixed income to take out a loan on 80% of her nearly paid-off house and put it into the stock market - in 2006. My mother had paid no taxes for the previous 3 years, so there was no tax reason to do this. Ignoring the burst in the housing market and the effect of loosing the ability to make income on the eventual recovery (by having to take money out of her investments to pay the loan while the market sank), her losses on this were for the overpriced refi costs (done by the agents friends), the much higher interest paid on the new loan and the loss of capital that would have been paid off on the previous loan.

 

I'm finding it very difficult to comprehend how the IRS can construe making my mom partially whole on this as income, since she would not have paid tax on the result if her agent had been honest and none of this had happened.

 

Any help here?

 

Thanks!

 

P.S. - I signed up for a trial membership, so it's OK with me to count this as a new question.

Expert:  taxmanrog replied 12 months ago.
I don't think that the settlement will be taxable income to her. If she takes the amount she received, which you said was about 75% of what she put in, and compare that to her basis, which is the total amount she INVESTED, the difference would be a Miscellaneous Itemized Deduction, subject to the 2% limitation. The commissions come out of what she invested, I would not reduce the basis by them. So the settlement would be tax free, and would also generate a deduction for the loss she incurred.

I am glad that your mom got her settlement! Many people don't. I had a client who was swindled with a similar inappropriate investment, sold to him by his next-door neighbor, who was an insurance agent! He was consulting an attorney but passed away before he did anything.

I hope this answers your questions! If you have any more or need clarification, please feel free to ask!

Thanks!

Roger

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