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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11162
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Can a penalty from an early withdrawal on an annuity be filed

Customer Question

can a penalty from an early withdrawal on an annuity be filed as a deduction on my income tax return?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Hi and welcome to our site!Federal tax is not allowed as deduction but any amount of federal tax withheld (including withholding from annuity distribution is reported on line 62 form 1040 and CREDITED toward your total tax liability.
Expert:  Lane replied 1 year ago.
Hi,
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 4797.
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...
Lane
Expert:  Lane replied 1 year ago.
Hi,
… just checking back in to see how things are going.
Did my answer help?
Let me know…
Lane