The child can exclude approximately $297,141.02 of the first year's payment from their taxable income.
Here's how to calculate the excludable portion of the first year's payment for the child:
1. Calculate the present value of the annuity:
Formula: PV = Annuity Payment / (Discount Rate * (1 - (1 + Discount Rate)^-Years))
Values:
Annuity Payment = $60,000
Discount Rate = Assume a 5% discount rate (adjustable based on relevant factors)
Years = Life Expectancy = 25 years
2. Calculate the present value of the lump sum payment:
Present Value of $1,000,000
3. Calculate the excludable portion:
Subtract the present value of the annuity from the present value of the lump sum payment.
Example Calculation:
Assuming a 5% discount rate:
Present Value of Annuity = $60,000 / (0.05 * (1 - (1 + 0.05)^-25)) ≈ $702,858.98
Present Value of Lump Sum = $1,000,000
Excludable Portion = $1,000,000 - $702,858.98 ≈ $297,141.02
Therefore, the child can exclude approximately $297,141.02 of the first year's payment from their taxable income.