Final answer:
The statement is true. If Susan's life expectancy for the annuity is 13 years, payments over that time would include a return of her initial investment (principal) and interest, with the principal fully returned by the end of this period. Thus, any payments received after this time, such as in the 14th year, would be fully taxable.
Step-by-step explanation:
The statement that 'Susan must include the entire $18,000 received in the 14th year in her gross income' is True if Susan has exhausted her investment in the annuity by that time. An annuity is an investment from which you receive fixed, regular payments. The payments received from an annuity are typically broken down into an investment portion (return of principal) and earnings. Over the life expectancy for the annuity, the portion of each payment that represents a return of principal is not taxable, but the earnings portion is.
Once Susan has recovered her $200,000 principal through the annuity payments, any further payments would be fully taxable. If her life expectancy is 13 years, then the payments were likely calculated so the principal would be slowly returned over that 13-year period, with each $18,000 payment being partly return of principal, and partly taxable interest. For example, if the entire principal was spread evenly over 13 years, each year Susan would receive about $15,385 of principal and $2,615 of earnings, making the principal portion fully paid back after 13 years.
Therefore, if Susan lives longer than expected and collects payments for 14 years, the payment in that 14th year would indeed be fully included in her gross income since the principal will have already been paid out completely.