Question

A taxpayer, age 64, purchases an annuity from an insurance company for $64,000. She is to receive $533 per month for life. Her life expectancy is 20.8 years from the annuity starting date. Assuming that she receives $6,400 this year, what is the exclusion percentage, and how much is included in her gross income?

Answer 1

Exclusion percentage = 48.10

$3321.6 IS included in her gross income

Step-by-step explanation:

Exclusion Percentage = Investment in Total /(Payments made * Life Expectancy *Total months in a year)

Exclusion Percentage = $64,000 / ($533 * 20.8 *12)

Exclusion Percentage = 0.4810

= 48.10%

The Included in income amount can be calculated using the following formula:

Included in Income = (Received amount - Return on Capital)

& Return on Capital = ( Received amount * Exclusion percentage)

When ROC = $6,400 * 0.4810 = $3078.4

Hence, Included in income = $6,400 - $3078.4 = $3,321.6