Annuity full surrender - Are taxes owed if funded with post-tax dollars?

[1040Friendly]

I started an annuity about six years ago and decided to take a cash full surrender this year. I assume there will be no tax implications considering that

1. I funded the annuity completely with post-tax dollars (it was not drawn off my pay checks), and
2. The full surrender amount was less than the amount that I funded the annuity with (the gains to the fund were slightly less than the penalty for the surrender)

What concerns me is that the company sent me a letter stating that they would report the full surrender amount to the IRS as taxable income for the current tax year. It also cited the salient tax implications including 10% tax penaly for contract owners under 59 1/2.

Should I be concerned about this company sending this info to the IRS? And is there anything I should do to get in front of this? or is the best approach to just wait and see if the IRS contacts me regarding this?

Thanks eveyone!

[ Link to see full image ]

 

[adjusterjack]

It really doesn't matter what gets sent to the IRS as long as you have records and statements to document the actual taxable income. You file your tax return with the actual figures and keep the documentation in your permanent file in case you are every audited.

I have had 1099s for hundreds of thousands of dollars of distributions and have never been questioned about how I reported it.

 

[Taxing Matters]

Should I be concerned about this company sending this info to the IRS? And is there anything I should do to get in front of this? or is the best approach to just wait and see if the IRS contacts me regarding this?

The company is required by the tax code to submit the 1099 form for the distribution. Once you get the 1099 you then report the transaction properly on your return. If the IRS has questions about what you claimed on the return, it will contact you and you can respond with whatever information is required to satisfy the IRS that you reported it correctly. In many cases the IRS is satisfied with the extra information and the matter is closed. There is nothing to do to "get ahead" of it because you won't even know there is an issue at all until the IRS contacts you, if it ever does.

 

[LdiJ]

I started an annuity about six years ago and decided to take a cash full surrender this year. I assume there will be no tax implications considering that

1. I funded the annuity completely with post-tax dollars (it was not drawn off my pay checks), and
2. The full surrender amount was less than the amount that I funded the annuity with (the gains to the fund were slightly less than the penalty for the surrender)

What concerns me is that the company sent me a letter stating that they would report the full surrender amount to the IRS as taxable income for the current tax year. It also cited the salient tax implications including 10% tax penaly for contract owners under 59 1/2.

Should I be concerned about this company sending this info to the IRS? And is there anything I should do to get in front of this? or is the best approach to just wait and see if the IRS contacts me regarding this?

Thanks eveyone!

[ Link to see full image ]

I agree with Taxing Matters but I do have some concern with your belief that they will report the entire amount as taxable and the implication about the 10% tax penalty. What you are describing would seem to be an ordinary investment annuity, but what they seem to be implying is that it is a traditional IRA qualified annuity. With an ordinary investment annuity the 1099 should only report any tax deferred growth/interest as taxable income and there would not be a 10% tax penalty.

I hope there were no initial errors made in the type of account/annuity opened. If you don't normally use a tax professional to do your taxes you might want to consider one this year.