Question

Exercise 4-26 (Algorithmic) (LO. 4)

A taxpayer, age 64, purchases an annuity from an insurance company for $84,000. She is to receive $700 per month for life. Her life expectancy 20.8 years from the annuity starting date. Assuming that she receives $8,400 this year, what is the exclusion percentage and how much is included in her gross income?

Round the exclusion percentage to two decimal places. Round the final answer for the income to the nearest dollar.

Exclusion percentage:	48.08	%
Included in income:	$

Answer 1

Answer

The exclusion percentage is calculated as follows:

Exclusion percentage = (Purchase Value of Annuity)(Monthly Payment*Life Expectancy*12)*100

[where Monthly Payment*Life Expectancy*12 indicates the expected return]

Using the values provided in the question, we get

Expected return is $700 x 12 x 20.8 = $1,74,720

Exclusion ratio = $84,000/$1,74,720= 48.08% return on capital

Annual payment * Exclusion ratio = non taxable return of capital

$8,400 * 48.08% = $4,038.72 (a nontaxable return of capital)

Included in gross income $8,400 - $4,038.72 = $4361(rounded off to nearest dollar)