Question

philip southerly purchases a joint and survivor annuity providing for payments of $200 per month for his life and, after his death, $100 per month for his wife's life. As of the annuity starting date he is 70 years old and his wife is 67. the annuity cost Philip $28,000. Determine the exclusion ratio for the annuity Philip purchased and the amount of the pension to be included in gross income

Answer 1

In absence of amount expected to be received by Phililp, lets assume that Philip will be alive for next 15 years and during that period he will receive $ 200 x 12 months x 15 years = $ 36000

Exclusion ratio is that part of the monthly payment which is part of the capital invested. That is in this case, out of $ 36000, $ 28000 would be capital and remaining would be interest. $ 28000 would not be taxable and thus exclusion ratio would be $ 28000/$ 36000 = 77.77%

In gross income, 77.77% would be excluded and only 22.22% that is $ 200 x 22.22% would be taxable i.e. $ 44 (rounded off). This $ 44 per month would be included in gross income.