Questions arise on deductibility of penalty fee


Q: One of your past columns stated that a penalty for early withdrawal on a certificate of deposit is tax-deductible as a capital loss. Does this also apply to annuities? My wife cashed in a tax-deferred annuity of $2,315.70 early and was charged a 10 percent penalty. Is this tax-deductible?

A: That depends on whether it was an early redemption fee charged by the insurance company or an Internal Revenue Service penalty for withdrawal prior to age 59 1/2 . IRS penalties are never deductible.

But if it is a contract-related penalty, it is regarded as a Section 212 miscellaneous deduction -- expense for the production of income -- which is deductible after the miscellaneous category exceeds 2 percent of adjusted gross income.

Why is this penalty treated differently from a certificate of deposit penalty for early withdrawal? I have no clue, but I didn't make up the IRS code either. Furthermore, I've given up questioning the logic of tax rules and regulations.

Fund update: The Women's Equity Mutual Fund, which invests only in women-friendly companies, has reduced its minimum investment from $2,500 to $1,000, and its additional investment minimum from $500 to $100. Minimum investments for individual retirement accounts and Keogh accounts remain at $500. For information, call (800) 424-2295.

Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278. All letters will be treated confidentially.

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