ANNUITY LOSS FROM INSURANCE COMPANY INSOLVENCY Help, please...

[MarkFL]

Hello- We will be incurring a 6-figure FIXED annuity loss due to a failed insurer. The insurer will be liquidated on 11/30/24. Because of a fraudulent agent's misguidance, we were vested beyond our state guaranty fund limits. (The former insurance company owner incurred one federal conviction and faces a 2nd fed conviction right now.) Again, this involves FIXED annuity losses, not variable -- big difference.

1. Is the loss deductible?
2. If so, which line; Miscellaneous Deduction or Ordinary Loss, subject to the 2% AGI rule?

3. We are more than well documented, including the federal charges & convictions of the failed insurer's owner, and I am a registered victim is this (huge) scandal with the USDOJ, in case of an audit.

Thank you all very much!

[MarkFL]

Thanks for the reply. Clarification, please: What's gone? The entire deduction or the 2% of AGI adjustment?
I have pulled up the entire bill (TCJA) and am reviewing Section 11045 regarding itemized deductions.  Is this what you're referring to?
"SEC. 11045. SUSPENSION OF MISCELLANEOUS ITEMIZED DEDUCTIONS.
(a) IN GENERAL.—Section 67 is amended by adding at the
end the following new subsection:
‘‘(g) SUSPENSION FOR TAXABLE YEARS 2018 THROUGH 2025.—
Notwithstanding subsection (a), no miscellaneous itemized deduc-
tion shall be allowed for any taxable year beginning after December
31, 2017, and before January 1, 2026.’’

Ouch.

[Mike9241]

You

how are worthless annuities treated

https://copilot.microsoft.com/?sendquery=1&showconv=1 

When an annuity becomes worthless, it is generally treated as a capital loss for tax purposes1. According to the IRS, you can deduct a loss for a worthless security, including annuities, in the tax year in which it becomes totally worthless1.

To claim this deduction, you'll need to provide evidence that the annuity has indeed become worthless2. It's a good idea to consult with a tax professional to ensure you're handling it correctly and to understand    how it impacts your specific tax situation.

note that the Kiplinger Blog 1 never mentions annuities specifically.  the other issue you have is knowing your tax basis in it. it may not be what you put in. it is also somewhat surprising because failed insurance companies are generally taken over by others that assume the responsibility.

if you invested in a scam that's a different matter completely. 

[Opus 17]

This presents a problem, because the difference between a theft and a failed business is complicated.   Losses due to theft are not deductible for 2018-2025.  Losses due to failed investments are a capital loss, they are listed on schedule D, and you can deduct up to the amount of your capital gains, plus $3000 per year, with the balance carried forward.  So it might be a good idea to liquidate some capital gains so you can use the loss to offset the taxes, but be careful of the wash sale rule when buying new investments.

So it is to your disadvantage to emphasize the fraud, convictions, and DOJ involvement.  You want this to be a business that was mismanaged, and maybe that resulted in some charges, but you don't want this to have been a fraud from the beginning.

Then, the amount of the capital loss depends on your basis.  This may be hard to determine, especially if you have been getting payments.  Suppose you invested $50K, you never got a payment, and the annuity on paper was worth $100K.  Your loss is $50K, the amount you invested, regardless of the value on paper.  However, suppose you invested $50K, you received $1000 per month, and the value on paper is $100K.  Your loss is less than $50K, because you got some of the principal back, but how much principal you got back included in those payments might be hard to calculate.

You also have to figure the state guarantee payment.  If you invested $50K, the value on paper is $100K, and the guarantee payout is $60K, you don't even have a loss, you have a small gain, that is taxable, even though it is less than you expected.  

Bottom line, you can only deduct what you invested, or what is left of what you invested.  You get no deduction or tax break for money that you were never paid, because you never paid taxes on the income, and you can't deduct something from your income that is not part of your income in the first place. 

I think you should talk to a CPA to determine your basis and actual amount of loss.  

[MarkFL]

Opus17- Thanks for a very thorough reply. This formerly very reliable insurance company was sold to a now convicted new owner who, according to the Feds, siphoned off between $1B-$2B for his own affiliated investments which crumbled. So, while the Feds are alleging fraud (that trial starts next month), at this juncture it is "only" gross mismanagement of his annuitants' funds. Per your reply: When this goes to liquidation, also next month, we are set to recover all of our original invested capital and some interest. What we will be losing is about $100k in accrued interest, not the original capital investment. So it sounds like I don't have a write-off, as there is no loss of capital (principal).
Even if I did try to claim a loss, the actual return via an IRS refund would only be ~$13k, based on our tax bracket. Defending myself in tax court would cost far more than that.. I do read and understand the tax code, but, yes, this deduction is nebulous, per the code. I guess we'll take the principal and some interest (up to guaranty fund limits), and move on.
Thanks again for your insight!!

[Opus 17]

Yes, if you are receiving the principal plus some interest, you don't have a deductible loss, and the interest is taxable income.

You can't take a deduction for money that you might have received but didn't, because you can't subtract something from your taxable income if it was never included in your taxable income in the first place.