Can You Deduct the Loss on a Non-Qualified Variable Annuity?
Using a non-qualified variable annuity allows you to tie your return to various investments, such as stocks and bonds. Though this allows you to reap extra benefits when the investments do well, it can also result in losses. While it's possible that a loss in your non-qualified variable annuity might get you a tax deduction, the circumstances in which the IRS allows it are limited.
No Temporary Decrease Deduction
If your non-qualified variable annuity simply has a bad year, you're not going to receive any sympathy on your taxes from Uncle Sam. As long as you still own the non-qualified annuity, you can't claim a loss, which means that most people can't take a deduction. For example, if your variable annuity has a rough year and the value declines by 10 percent, that alone won't entitle you to a deduction.
You can't deduct the loss on your non-qualified variable annuity unless you receive a lump-sum distribution that's less than what you paid. The lump-sum can only consist of cash and worthless securities. For example, say you invested $50,000 and you receive a lump-sum distribution of $30,000 cash. You have a $20,000 loss for tax purposes. If you receive securities that aren't worthless, you can't claim a loss.
The deduction for annuity losses is a miscellaneous deduction subject to the 2 percent of adjusted gross income threshold, which reduces the amount of your loss that you can actually write off. To figure your deduction, first figure 2 percent of your AGI and then subtract the result from your loss. For example, say your AGI for the year is $110,000 and you have a $20,000 loss. Since 2 percent of $110,000 is $2,200, subtract $2,200 from $20,000 to find that your deduction is only $17,800.
The deduction for annuity losses is only available if you itemize, which means you've got to give up your standard deduction. On Schedule A, the IRS form for itemized deductions, report your fully annuity loss on line 23. Line 24 reports your AGI and line 25 reports 2 percent of your AGI so your eventual deduction goes on line 26. When combined with the rest of your itemized deductions, it replaces your standard deduction on line 40 of your Form 1040 tax return.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."