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  • annuity cancellation

    Hi everyone, long time reader, first time poster.  I've got a tax question and just want to see if anyone can help me out.  Both my wife and I have a Vanguard variable annuity (1035'ed from whole life policies, I should post that story in the other thread and contribute to the weekly bad WLP too!).  Anyway, the cash value of each policy is about 10k under the cost basis.  If I cancel both policies does the 2% floor rule for deducting the losses apply to both as if they were one cancellation or is it applied twice?  For example, if I make 300k per year, 2% would be 6k, do I lose out on deducting 6k for each policy, or is it just applied once for a total of 6k?  We do file jointly.  We are evaluating our options trying to decide the best thing to do with these annuities and may end up keeping them until they meet cost basis, or at least approach them a little more.  Thanks for the help!

  • #2
    Here's a link to a good article on the subject: http://www.thinkadvisor.com/2011/12/06/year-end-tax-planning-are-variable-annuity-losses

    As the article points out, it is definitely NOT an investment loss. It's deductible as an ordinary loss.  The big question is whether you claim it as a Miscellaneous Deduction or under Other Gains/Losses. Going the Other Losses route is more aggressive, and therefore riskier, but would allow you to fully deduct the loss.

    i would suggest running this past your CPA.

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    • #3


      If I cancel both policies does the 2% floor rule for deducting the losses apply to both as if they were one cancellation or is it applied twice?
      Click to expand...


      The 2% is against your combined AGI.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Thanks everyone!  Faithful Steward: I have to sign up to read that article, but will try do that in the near future.

        Johanna - what I'm asking is since it's 2 policies that would be cancelled, with a total "loss" of 20k (10k +10k) and an AGI of 300k, taking into account the 2%, can I then deduct 14k (20k-6k) or only 8k (20k-12k) off of taxes.  In other words, does the IRS parse out the two VA policies and apply the 2% rule separately to each one, or are the losses added together and the 2% rule is only applied once?  Or am I completely misunderstanding this 2% rule?

        As Rex said, it's probably just easiest to keep them to basis, but now I'm partly interested just to know how it would be treated.

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