I have a different answer.
You were asking about the annuity surrender charge, not the tax itself.
The answer depends on whether your annuity is qualified (inside an IRA or retirement plan
) or non-qualified.
If it's qualified then no, it will just lower the amount of income that comes out as taxable income
The gain or loss on a surrendered NON-qualified annuity is equal to the surrender amount minus the cost basis.
The surrender amount, of course, being the annuity’s cash value MINUS the surrender charge.
And cost basis is the amount you contributed (single or multiple premiums paid-in.
Gains for non-qualified annuities are taxed as ordinary income
, not capital gains
And the losses are ordinary too (Ordinary losses that offset ordinary income).
If you DO have a loss, you can report your loss in Part II of IRS Form
Again, you can use the loss on the surrender of a non-qualified annuity to offset ordinary income.
Finally, if you still have a gain, (similar to the Qualified annuity) the surrender charge DOES provide a tax benefit
... because it lowers the amount of taxable income coming out of the annuity.
Let me know if you have questions...