In this scenario, since Bob took a loan against his nonqualified deferred annuity, we need to consider the tax implications of the loan amount.
When a loan is taken from a nonqualified annuity, it is not immediately taxable. However, if the policy were to lapse, or if the loan were unpaid upon withdrawal from the annuity or receipt of funds, the loan amount would become taxable.
Bob has an initial investment of $80,000 and a cash value of $96,000, which means he has a gain in his annuity of $16,000. When he takes a loan for $20,000, he has not yet triggered a taxable event because loans are generally not taxable as income when they are taken out.
However, if Bob were to surrender the annuity or if it were to lapse while he still has a loan against it, the amount of the loan that exceeds his basis (his investment in the contract) becomes taxable. Since he has taken a loan of $20,000 but has a total gain of $16,000, if he were required to repay the loan, the $4,000 of the loan would be taxed (as it's over his original investment).
Bob's total tax liability on the loan amount, assuming that it later became taxable due to a lapse in the contract, would then be the gain portion (which exceeds his basis) multiplied by his tax rate:
- Taxable amount: $20,000 loan - $16,000 gain = $4,000 taxed as ordinary income.
- Tax liability: $4,000 (taxable portion) * 22% (tax rate) = $880.
Given these points, however, it is important to note that currently, there is no immediate tax owed because the loan itself is not a distribution.
So, if Bob just takes out the loan and does not default on it or trigger a taxable event (like surrendering the annuity), then his immediate tax liability is:
Answer: 1. $0
This is because there are no immediate tax consequences related to just taking a loan from a nonqualified deferred annuity unless specific conditions are met.