Final answer:
The exclusion ratio for both annuity options A (term of 15 years) and B (lifetime with life expectancy of 15 years) is 66.67%, with 33.33% of each payment being taxable. If the annuitant lives beyond 15 years, all payments become fully taxable, whereas if they die before 15 years, there may be different tax consequences due to the unrecouped investment.
Step-by-step explanation:
To calculate the exclusion ratio for an annuity, we divide the initial investment by the expected return. For case A, with a term of 15 years, the calculation is $10,000 (initial investment) / ($1,000 * 15), which equals 66.67%. So each year, 66.67% of the $1,000 payment is excludable from taxation, and 33.33% is taxable. For case B, if the taxpayer lives exactly 15 years, the exclusion ratio remains the same. If the taxpayer lives 18 years, the full $1,000 payment is taxable after 15 years because the $10,000 cost has been fully recovered. If the taxpayer lives only 10 years, they still exclude 66.67% of each payment; however, an unrecouped investment remains at death, which might lead to different tax implications.