No, you cannot deduct the balance from the taxable amount. It may be a deduction for itemized deductions if the deceased can itemize. Review the examples in the IRS publication to see the scenario for this decedent.
Exclusion limited to cost. If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost can't exceed your total cost. Any unrecovered cost at your (or the last annuitant's) death is allowed as an itemized deduction on the final return of the decedent.
Exclusion not limited to cost. If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your cost. In this case the deceased would be allowed the regular exclusion amount for his final return without any recovery of the balance.
Be sure to use Form 1310 if there is a refund on the tax return -- Can I file Form 1310 in TurboTax?
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