Annuity Distribution where box 2a does not reflect cost of the annuity contract

[Ted 3]

I purchased an annuity contract for 85,000 in 2009. The contract fully matured and I took a distribution in 2023 of $127,000. I will take the remaining balance in 2024 of $107,000. The 1099r for 2023 reflects box 1 of 127,000 and box 2a of $127,000. Under the general rule I have calculated the taxable portion to be $81,000. Since the amount I will use is different than the amount reported on the 1099r is there a way to use TT to disclose the use of the general rule so it won't cause problems with the IRS when the amounts are different?

[DavidD66]

The taxable amount in box 2a is correct.  When you take distributions from a non-qualified annuity, any interest or earnings within the annuity will be distributed before the premium or principal amount.  It is taxed on the LIFO basis: Last in, First out.  Since your $85,000 investment amount grew to $234,000, your $127,000 distribution is all earnings with no return of principal.  The "exclusion ratio" comes in to play when you annuitize, or start receiving a stream of guaranteed payments.   

There is an exception to the earnings first rule for contributions made to annuity contracts prior to 8/14/82. These contributions are distributed on a first in, first out (FIFO) basis and the owner is not taxed until such contributions are fully recovered.  But that would not apply in this case. 

If you change the amounts on your 1099-R, it won't agree with the information the IRS has received.