Are Variable Annuity Losses Tax Deductible?
By Hersh Stern - July 7, 2013
Losses experienced with some non-qualified investments, such as individual stocks and bonds, are tax deductible. Are annual losses experienced within a variable annuity contract tax deductible? The short answer is...it depends.
No Deductions for Short Term Account Reductions
Most non-qualified annuity owners intend to hold their contract throughout their retirement years. If the account experiences losses within any one given year, those losses are not currently deemed allowable tax deductions. Losses on non-qualified variable annuity contracts cannot be captured by the current owner. Therefore, short term account reductions attributed to market decline do not entitle the account owner to take advantage of a tax deduction.
How can a Non-Qualified Variable Annuity Loss be Claimed for Tax Purposes?
While non-qualified variable annuity account losses cannot be claimed within a year whereby the contract remains in force, it may be possible to claim a tax deduction for losses experienced when a lump-sum distribution is taken. For example, if an annuity owner originally placed $100,000 into a contract and receives $75,000 as a lump sum distribution upon requesting a lump-sum distribution (considering any previous withdrawals, distributions), they may be eligible to claim a loss on their income taxes in the amount of $25,000. If securities without a current value are received as a distribution, losses cannot be claimed for this contract.
How does an Annuity Owner’s AGI Affect Loss Deductibility?
A non-qualified annuity loss is treated as a miscellaneous deduction for tax purposes. As such, the deduction is subject to the 2% adjusted gross income (AGI) threshold, which potentially limits the amount of losses that the annuity owner is permitted to deduct. To determine what percentage of your account losses may be deductible, first calculate 2% of your AGI. Next, deduct from this figure your total annuity losses. The resulting amount is what is eligible for deduction on your federal return.
Annuity Losses and Itemization
Annuity losses can only be captured for tax filers who currently itemize. Filers choosing to capture annuity losses for a given tax year will be forced to itemize, thus giving up their standard deduction. Ultimately, non-qualified variable annuity losses are deductible for tax purposes under the conditions outlined above. But as tax laws change annually, it is important to discuss your current tax situation and how an annuity distribution resulting in a capital loss may impact your household’s financial health prior to completing the transaction.