Question

Flowers, a single taxpayer, purchased an annuity for $64,400 that will pay $700 per month until she dies. At the time of purchase, her life expectancy was 23 years. Flowers received payment beginning April 1, Year 1, amounting to $6,300 in the first year of the annuity contract. How much is includable in Flowers' gross income in the first year?

		$2,100
		$4,200
		$6,300
		$0

Answer 1

Ans: $4200

Solution:

If Any Amount taken as Annuity which is repayable in Installments, Such amount is eligible to be deducted as a cost of recovery amount i.e Cost to Cost Basis is allowed for deductions from earned income of Such Assessment Year

So

Total Amount of Annuity =64400

No of years Expected Life=23 Years

Which is payable Equal Monthly Instalments as Cost to Cost basis=64400/23=2800 Per Year

Per Month=233.33/-

Total Amount Paid As Cost to Cost During the Year= From April to December=9 months*233.33=$2100 is deductible from earned of income of $6300

Therefore $6300-$2100=$4200 is includible in Gross total Income