If you have a loss on the surrender of a non-qualified
annuity, there is no tax deduction for it, but there would be no income tax on
the distribution either; the information TurboTax would need to calculate this
would be included on the 1099-R. For
example look here: http://www.irs.gov/pub/irs-prior/f1099r--2016.pdf
Non-qualified annuities give a nice tax benefit in that tax
is deferred inside them as value grows above cost basis, but when distributed,
the gain is taxed first at ordinary income tax rates, not capital gains. You may not take a capital loss as you do with a stock sale.
However, if you only took a partial distribution (not a full
surrender), and there is gain
inside the contract, you will pay tax on the gain first. This is called LIFO taxation (last in, first
out). See this link for a quick
explanation: http://en.wikipedia.org/wiki/FIFO_and_LIFO_accounting
So for instance if you had non-qualified annuity which you
had purchased for $50,000 and you took a partial surrender of $10,000 when the
value was $55,000, you would pay tax on $5,000, and the other $5,000 would be a
return of basis and therefore be tax free.
(This does not assume any contract surrender charges). The cost basis would then be $45,000 for
future distributions.
In the same situation if there was a distribution when the
value was only $45,000 after purchase for $50,000, then there would be no tax
since there is no gain in the contract at that time. The cost basis would be decreased by the
amount of the distribution.
Therefore, if your 1099-R shows that the distribution was
less than the cost basis, you will not have to pay any tax unless there is gain in the contract.
Also, many people are not aware that non-qualified annuities
have an age requirement of 59 ½ like IRAs for distributions to be made without early
withdrawal tax penalties.
See this link for helpful information: http://wiki.fool.com/Taxation_of_Non-Qualified_Annuities
