Annuity withdrawal

[pnetrick]

We had around $225000 in an annuity and we are both over 62. We decided to pretty much eliminate our debt an withdrew or closed the account. We only received $180000. Can we deduct the difference and how?

[DianeW777]

It depends. If you can track your cost in the annuity, meaning the cost you paid for it that was with after tax dollars, you will pay tax on only the earnings. The 1099-R should be completed correctly to reflect this.

• A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. 
• IRS Publication529

Generally, there is no deduction on Schedule A for a loss in an annuity for tax years 2018 through 2025 due to the suspension of miscellaneous itemized deductions by the Tax Cuts and Jobs Act.

[dmertz]

If some portion of the distribution went to state tax withholding, this portion can be included on line 5a of Schedule A.  TurboTax will do this automatically upon entering the Form 1099-R if your itemized deductions exceed the standard deduction.  Federal tax withholding is not deductible on your federal tax return, but might be deductible on some state tax returns (Alabama, Missouri and Oregon).

[pnetrick]

We took $198000 out of our TSP account (at age 621/2) and put it into this Lincoln account. The original plan was to have that money supplement our retirement. After a couple of years and noticing that the account had a value of about $225000, it was recommended that we 'close' that account and pay off most of our debt (other than house and 1 vehicle). We did that and were provided a check for $179000 with no tax withheld, payed off everything, and put $50000 into a CD that has matured, so that we had funds to pay our taxes. We knew that we would have to pay and have no issue with that. We just want to know if we are able to account for the loss between the original $198000 (that, since we moved the funds into another qualified account so there were no taxes paid on that amount) and the $179000 that we actually received. Lincoln charged us a penalty of $19000 for closing the account early so they made money from that transaction.