Question

Larry purchased an annuity from an insurance company that promises to pay him $6,000 per month for the rest of his life. Larry paid $630,720 for the annuity. Larry is in good health, and he is 72 years old. Larry received the first annuity payment of $6,000 this month.How much of the first payment should Larry include in gross income?If Larry lives more than 15 years after purchasing the annuity, how much of each additional payment should he include in gross income?What are the tax consequences if Larry dies just after he receives the 100th payment?

Answer 1

Part A

Amount to be included

$2400

Expected return multiple = 14.6 for a 72 year-old

expected return multiple	14.6
number of annual payments	12
amount of payment	6000
expected total payment (14.6x12x$6000)	1051200
return of capital percent ($630720/$1051200)	60%
return of capital per payment ($6000x60%)	$3600
gross income per payment ($6000-$3600)	$2400

Part B

Amount to be included

$6000

The entire $6000 monthly payment is included in gross income as the entire original investment has been received by as a return of capital by the end of year 15.

Part C

Amount to be deducted

$270720

Return of original investment recognized = 100*3600 = $360000

Larry’s final tax return deduction = 630720-360000 = $270720