Tax Prep by Deb Posted October 5, 2007 Report Share Posted October 5, 2007 I hope that maybe someone can help me out here, especially in understanding why someone would do this? I have a client whose daughter passed away and left him a sizeable life insurance policy, around $400,000.00. From everything I researched it doesn't appear to be taxable and was never reported as such for example a 1099 being issued to my client. My client then turns around and invested it into an annuity. He did take some money out and was issued a 1099 for the amount withdrawn. Am I correct that this withdrawl is now taxable? Am I missing something? If the withdrawl from this annuity is taxable, why would anyone invest money that was tax free into something that is going to be taxed? I have only had one other client who invested money in an annuity, so this is definitely not be area of expertise, but I would like to understand the workings of this better. Can anyone offer some info? Thanks in advance, Deb! Quote Link to comment Share on other sites More sharing options...
Pacun Posted October 5, 2007 Report Share Posted October 5, 2007 It sounds to me that the money he took out is return of capital. Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted October 5, 2007 Author Report Share Posted October 5, 2007 It sounds to me that the money he took out is return of capital. So then, when you do the work on the tax return, how do you show the distribution as a return of capital? It is reported on the 1099 as a normal distribution. Box 1 is listed as the gross distribution of $21,060.00 and box 2a (taxable amount as $17,070.86. The difference os $3,989.14 is listed in box 5 as an Employee contributions/Designated Roth contributions or insurance premiums. The distribution code is 7. If I imput this infor into the software exactly as I would any other 1099 it is taxing him on the $17,070.86. Is there another form used to show that this is a return of his capital? Thanks, Deb! Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted October 5, 2007 Report Share Posted October 5, 2007 According to the 1099R, that 17K is NOT return of capital, it is the percentage that is income. Does not sound right, but clearly that is what it is saying. I'd contact the issuer, and ask for a clarification as to how the earnings could be that high in such a short time. They might have reversed the amounts in box 2a and box 5, perhaps? Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted October 5, 2007 Author Report Share Posted October 5, 2007 According to the 1099R, that 17K is NOT return of capital, it is the percentage that is income. Does not sound right, but clearly that is what it is saying. I'd contact the issuer, and ask for a clarification as to how the earnings could be that high in such a short time. They might have reversed the amounts in box 2a and box 5, perhaps? K.C. I actually have statements that were issued to my client, and when I compare starting value, ending value, and what he took out it appears correct. I would love to have him contact the issuer, unfortunately my client is now deceased and his son his handleing his affairs. When ask even simple questions, he has no clue. May be I'm just not seeing things right. Let me show you exactly what he ending statement for 12/31/06 states. It shows contract value on 12/31/2005 as 0.00 Total Payments as $250,000.00 Total withdrawls of $21,060.00 Surrender value on 12/31/06 as $230,735.99 Death benefit on 12/31/06 as $246,834.94 Contract Value on 12/31/06 as $246,834.94 I don't know where I originally thought this annuity was for $400,000.00 because the paperwork is definitely showing $250.000.00. He probably used the other money from the life insurance proceeds for other things and only invested $250,000.00 in this annutiy. Again thanks for your help, and I sure hope all is well with your husband. I've been on vacation for the past 10 days so I haven't been reading many posts. But you both have been in my thoughts! Deb! Quote Link to comment Share on other sites More sharing options...
fredazcpa Posted October 6, 2007 Report Share Posted October 6, 2007 K.C. I actually have statements that were issued to my client, and when I compare starting value, ending value, and what he took out it appears correct. I would love to have him contact the issuer, unfortunately my client is now deceased and his son his handleing his affairs. When ask even simple questions, he has no clue. May be I'm just not seeing things right. Let me show you exactly what he ending statement for 12/31/06 states. It shows contract value on 12/31/2005 as 0.00 Total Payments as $250,000.00 Total withdrawls of $21,060.00 Surrender value on 12/31/06 as $230,735.99 Death benefit on 12/31/06 as $246,834.94 Contract Value on 12/31/06 as $246,834.94 I don't know where I originally thought this annuity was for $400,000.00 because the paperwork is definitely showing $250.000.00. He probably used the other money from the life insurance proceeds for other things and only invested $250,000.00 in this annutiy. Again thanks for your help, and I sure hope all is well with your husband. I've been on vacation for the past 10 days so I haven't been reading many posts. But you both have been in my thoughts! Deb! Hope this will help, with an annuity when you take a "withdrawal" the earnings are taken out first then if the withdrawal amount is more that earnings, then the principal is taken. the 1099R you show a total withdrawal of $21060 and the taxable amount of 17K, this is what the insurance company had paid to the contract at the point of the withdrawal. The Surrender value is the cash you get out if your client surrender the contract and took all the money out. the differance between the contract value/death benefit would be what is left of the principle and maybe some earnings. if the contract is annunitzed then each payment is a return of principle and earnings. Quote Link to comment Share on other sites More sharing options...
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