Unrecovered investment in an annuity

[David]

TP cashed out his annuity and was told by his broker that he could write off the difference between his tax cost basis vs. the amount he received. This difference is ~ $199K.

The only thing I can find in the pubs and regs is that when a TP dies the unrecovered investment can be deducted on his final return on Sch A, not subject to the 2% limitation.

Can the TP write off the unrecovered amount since he cashed out of the annuity?

Thanks.

[MsTabbyKats]

A few years ago a client had an annuity that became worthless. I believe I took the loss subject to the 2 per cent. The taxpayer is alive and well.

[jklcpa]

Short article from Pennsylvania Inst of CPAs website: http://www.picpa.org/ask/public/View.aspx?id=100&ReturnUrl=Search.aspx%3Fi%3D3%26k%3D%26c%3D2

Another from Investopedia, a nice summary & bottom section covers your situation, and talks of the 2 approaches: http://www.investopedia.com/articles/pf/05/annuitylosses.asp

Not great sources to rely on, but both are saying and referencing the same thing and same Rev Ruling.

[MsTabbyKats]

Read the article ....and just want to mention that this happened about 2009...when you could actually get helpful help from the IRS

and it was the IRS who told me how to deduct this. I also had a client who had $110,00 in a bank account that year...the bank went under...and she lost $10,000. I reported it the same way.

[David]

Judy, thanks for helping me with this. I appreciate it.

[David]

Read the article ....and just want to mention that this happened about 2009...when you could actually get helpful help from the IRS

and it was the IRS who told me how to deduct this. I also had a client who had $110,00 in a bank account that year...the bank went under...and she lost $10,000. I reported it the same way.

The client filed an extension and we are revisiting this issue.

When you say you reported the losses the same way, which way are you referring to - ordinary loss on line 14 or Sch A subject to the 2%?

[SaraEA]

David, this client should contact the company that sold him this losing annuity and ask for the compliance department.  Any person who loses $199k was likely suckered.  Was he put into something too risky for his age and amount of assets he could afford to lose?  Sure they'll say he signed everything but that doesn't mean he understood everything.  Insurance brokers do not like complaints filed with the compliance dept.  If he gets no where there, next step is the state agency that regulates insurance companies.  Just the threat of going to the regulators might convince the compliance folks to be compliant.

 

We had an elderly client who came in with a fistful of 1099s one year.  Turns out her annuity salesman was cashing out her annuity every MONTH and buying her a new one.  His commissions soared while her wealth vanished.  We ourselves turned this one over to the state insurance commissioner.

 

We had several clients who lost big sums with a financial advisor who was playing games with their investments, cashing in certain bonds of the type that are supposed to be held to maturity and incurring huge penalties for early exit, then buying the same thing all over again.  This was a bank brokerage arm, and the compliance dept at first made a low-ball offer at restitution, the client said no, and they made him whole.  Another is still waiting for a decision (the bank's president is involved in reviewing his case).  I have a dozen clients investing with this jerk, but I noticed that since those episodes their yearly statements show no more hanky panky.  An honor for me was that an advisor at a different bank who helped me with one of these people who also had an account with him has sent me several really good clients because he learned during the ordeal that I too care about my clients.

 

Annuities got a really bad name during the time frame your client lost all this money because of the salespeople selling inappropriate contracts.  Call them out.

[David]

Are you suggesting that my client contact the compliance department to request the insurance company reimburse him for his loss?

[SaraEA]

I am definitely suggesting that the client contact the compliance dept, and if that doesn't work the state regulators.  You need more info from the client:  What is his age?  How much money did he have and what percent did he invest in the annuity?  What was the annuity invested in?  If having this data doesn't help you understand if the guy was fleeced, call a trusted broker or perhaps someone at another firm where the client has an account.  (That's who helped me help a client.  He was appalled at what the advisor did to our mutual client and guided me through the complaint process.)

 

If you find the client was 80 years old and had $200k to invest, he should have been put into something that carried little or no risk.  (Insurance companies got into huge trouble putting old people into inappropriate investments.  The stock market crash in 2008 hurt so many folks because they were invested in vehicles they had no business being in, and that time frame coincides with the year your client took that huge loss.)  If the guy was 40 or 50 and had $500k in investable cash, you probably won't have a case.  It's worth finding out.