some guidance
As you suggest, there is a way to possibly use this to your advantage by declaring the variable annuity a "loss" and using this to reduce your income taxes.
First, you have to sell or surrender the annuity.
To calculate your gain or loss, you have to figure your "cost basis." This is the total amount of principal you contributed, minus any withdrawals you made. From this, subtract the proceeds from the sale. If you paid a surrender charge, you have to add this back in.
Using an example, we'll assume your total contribution to your variable annuity was $80,000, that you took $15, 000 in withdrawals, that the annuity is worth $60,000 on the day you cash it out, and that you have to pay a $2,000 surrender charge for canceling the contract early.
Although you receive a check for $43,000 ($60k - $15k - $2k , your reportable loss is $5,000 ($80k-#15K-$60k) -- not $7,000. The $2,000 surrender charge is not considered part of your loss. One bright spot: even if you are under age 59 1/2, there will be no 10% early withdrawal penalty from by the federal government because, as mentioned above, this is only imposed on gains.
Now here's where we enter the "murky" zone: Where on your tax return do you report this loss?
A loss on a variable annuity is not considered an "investment" loss. You cannot use it to offset income from investments such as mutual funds or the profit you realized from the sale of stock. Instead, it is classified as an "ordinary" loss, which means it is (potentially) fully deductible in a single tax year.
As a Misc itemized deduction - it would not be deductible due to changes in the tax laws - the conservative approach
Now here's the more gutsy approach: Instead of listing your annuity loss as a non deductible expense some tax experts think it is more appropriate for it to be listed under "Other Gains/Losses" schedule 1 line 4 sure you seek the help of an experienced tax professional and investment advisor.
By the way, if you take the more aggressive approach and happen to end up in tax court, you will not only be immortalized in the annals of Tax History, you will become a saint of sorts to those who toil in the tedious theater of tax law: every CPA in America will appreciate you settling this issue once and for all!
the aggressive approach is based on Revenue Ruling 61-201, 1961-2, CB46.
can not find it in a web search or on IRS website.
if the loss is significant it could generate an audit. you will want a pro at your side, so I would suggest getting them involved in the prep of your 2019 return. they will have to defend their treatment
