How to Claim a Loss on a Variable Annuity
A variable annuity combines investments such as a mutual fund with a life insurance policy. The investment part of the annuity can vary up or down with the market, thus the term variable annuity. Many people buy variable annuities when the market is up, and when the market goes down they would like to sell these annuities and take the loss on their taxes.
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Instructions
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Calculate the loss on the variable annuity by first calculating the cost basis. This figure is the amount of principal that was added to the annuity, minus any withdrawals. Many insurance companies impose a surrender charge if the annuity is being cashed in early. This surrender charge has to be added to the principal minus the withdrawals because it is not deductible. Subtract the current value of the account from the total principal. This is the loss.
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Classify the loss from the annuity as an ordinary loss and add it to the miscellaneous deductions on form 1040. Doing this means that there is only a deduction if the the total miscellaneous deductions are more than 2 percent of the adjusted gross income. This means that the first 2 percent is not deductible. The drawback of this way is it can not be employed if the taxpayer is subject to the alternative minimum tax (AMT).
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Complete form 4797 and record that form number on the tax return under "other gains and losses". This will allow for the full loss to be taken without the 2 percent of adjusted gross income rule applying. This method can be employed when the alternative minimum tax applies. There is also an IRS ruling from 1961 that can be included with the tax return to lend validity to this approach.
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