Final answer:
In year 5 of her commercial annuity, Susan's related gross income is $5,000 because it's still within her life expectancy period and she can exclude 50% of her annuity payment. In year 25, her related gross income becomes the full annuity payment of $10,000 since she has outlived her life expectancy and no exclusion applies.
Step-by-step explanation:
The question refers to Susan's commercial annuity, which she purchased for $100,000, receiving $10,000 a year for life. Since her life expectancy was 20 years, the expected return of the annuity was $200,000 ($10,000 per year for 20 years). However, Susan lived for 30 years, which is 10 years beyond her life expectancy.
For tax and income calculation purposes, the exclusion ratio can be used to determine the part of the annuity payment that is considered a return of the purchaser's investment and therefore not taxed. The exclusion ratio for this annuity is the initial investment ($100,000) divided by the expected return ($200,000), which is 0.5 or 50%. This means, in the first 20 years, $5,000 (50% of $10,000) of each annuity payment is not subject to tax.
In year 5, Susan's related gross income would include the taxable portion of her annuity payment: $10,000 payment - $5,000 (exclusion portion) = $5,000 related gross income.
However, after 20 years, the entire annuity payment becomes taxable because Susan has already received her expected return of $200,000. Therefore, in year 25, her entire annuity payment of $10,000 is considered her related gross income since the exclusion ratio no longer applies.