Frequently Asked Questions
Who is eligible for the Deduction for Unrecovered Investment at Death?
Available when annuity payments cease due to the death of the annuitant and there is remaining unrecovered investment in the contract.
How does the Deduction for Unrecovered Investment at Death work?
Allows a deduction on the annuitant's final tax return if they die before recovering their entire investment in the annuity contract.
What law authorizes the Deduction for Unrecovered Investment at Death?
The Deduction for Unrecovered Investment at Death is authorized under IRC §72(b)(3) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §72
Source: Internal Revenue Code, Title 26, United States Code
§ 72. Annuities; certain proceeds of endowment and life insurance contracts(a) General rules for annuities(1) Income inclusionExcept as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.
(2) Partial annuitizationIf any amount is received as an annuity for a period of 10 years or more or during one or more lives under any portion of an annuity, endowment, or life insurance contract—(A) such portion shall be treated as a separate contract for purposes of this section,
(B) for purposes of applying subsections (b), (c), and (e), the investment in the contract shall be allocated pro rata between each portion of the contract from which amounts are received as an annuity and the portion of the contract from which amounts are not received as an annuity, and
(C) a separate annuity starting date under subsection (c)(4) shall be determined with respect to each portion of the contract from which amounts are received as an annuity.
(b) Exclusion ratio(1) In generalGross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date).
(2) Exclusion limited to investmentThe portion of any amount received as an annuity which is excluded from gross income under paragraph (1) shall not exceed the unrecovered investment in the contract immediately before the receipt of such amount.
(3) Deduction where annuity payments cease before entire investment recovered(A) In generalIf—(i) after the annuity starting date, payments as an annuity under the contract cease by reason of the death of an annuitant, and
(ii) as of the date of such cessation, there is unrecovered investment in the contract,
the amount of such unrecovered investment (in excess of any amount specified in subsection (e)(5) which was not included in gross income) shall be allowed as a deduction to the annuitant for his last taxable year.
(B) Payments to other personsIn the case of any contract which provides for payments meeting the requirements of subparagraphs (B) and (C) of subsection (c)(2), the deduction under subparagraph (A) shall be allowed to the person entitled to such payments for the taxable year in which such payments are received.
(C) Net operating loss deductions providedFor purposes of section 172, a deduction allowed under this paragraph shall be treated as if it were attributable to a trade or business of the taxpayer.
(4) Unrecovered investmentFor purposes of this subsection, the unrecovered investment in the contract as of any date is—(A) the investment in the contract (determined without regard to subsection (c)(2)) as of the annuity starting date, reduced by
Showing first 3,000 characters of full section text.