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

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 is 72 years
old. Larry received the first annuity payment of $6,000 this month.
Use the expected number of payments in Exhibit 5-1 for this
problem.
EXHIBIT 5-1 Table for Expected Return Multiple for
Ordinary Single-Life Annuity
Age at Annuity Starting Date
Expected Return Multiple
68...

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_____________
In 2050? ______________

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