"Thos B" <nobody[at]nowhere.noplace.no> wrote:

- quote -

Option 2, as per the IRS, and pretty much all authority on
the matter.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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Hoooeeee. It seems I've stepped in it this time.

Simple story with round numbers: I purchased an annuity for
$37000 and finally decided to eat the loss and bailed when
it had a value of 12,500. So I've taken a loss of $24,500
(not counting surrender charges - let's not go there). Here
I sit with tax info coming out the wazoo and I can't seem to
get a straight answer on how I can claim this loss. Note
that nobody has died and I am well below age 59 1/2 so all
we're talking about is my choice to prematurely end the
annuity before any payments were made.

The choices I've found are:

1) It's a Schedule D capital loss.
I think this theory has been pretty much discounted by every
other source as annuities do not appear to be considered
capital investments and the income they generate is ordinary
income. But I include this choice for completeness. Here's
a reference supporting this option:
http://www.stpetetimes.com/2002/03/1...On_money.shtml
(2nd question in the column).

2) It's a loss to be itemized on your Schedule A, subject to the 2%
limitation
I believe this would end up on line 22 of the 2004 Schedule A.
http://www.financial-planning.com/ph...=11253&t=11082
(this links to a quote from pub 525, but is part of a larger
discussion)

3) It's an ordinary loss to be claimed "above the line" and
entered in part II of Form 4797, which flows to line 14 of
the 2004 1040.

http://forums.kiplinger.com/archive/...hp/t-1695.html

And here are some references that bat around options 2)
and 3) and let you make the choice:
http://www.fool.com/taxes/2004/taxes041119.htm
http://www.forbes.com/investmentguid...607/197_2.html
http://www.financial-planning.com/ph...=11082&t=11082
http://groups-beta.google.com/group/...531db804716bdf
(a m.t.m discussion from 2002)

This is a very significant deal for me as I'm smacking up
against AMT and options 2) and 3) are hugely different as a
result. With option 2) [Schedule A] I owe $3600, while for
option 3) [Form 4797] I get a refund of $3600. While the
refund is phenomenally tempting, I'm most interested in
doing the right thing.

I look forward to any comments on the matter.

Thos.

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