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 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 | 17.6 |

69 | 16.8 |

70 | 16.0 |

71 | 15.3 |

72 | 14.6 |

Problem 5-52 Part-b (Algo)

**b.** If Larry lives more than 15 years after
purchasing the annuity, how much of each additional payment should
he include in gross income?

**c.** What are the tax consequences if Larry dies
just after he receives the 100th payment?

Answer #1

Answer :(b.) **The entire Amount of $6000 should Larry
include in his Gross Income because he must have recieved the whole
of the original investment in these 15 years.**

(c.) For the purpose of calculating tax consequences we must need to determine the amount of Expected Total Payment :

Expected Total Payment = Expected ReturnMultiple * Number of Annual Payment * Amount of payment

= 14.6 * 12 * 6000

= 1051200

Return of Capital % = 630720 / 1051200 = 60%

Return of Capital Per payment = 6000 * 60% = 3600

**As the Larry has only recognized (100 * 3600) i.e 360000
, the executor of Larry is entitled to deduct 270720 (630720 -
360000) from his Final return of tax**

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...

Larry purchased an annuity from an insurance company that
promises to pay him $1,500 per month for the rest of his life.
Larry paid $165,564 for the annuity. Larry is in good health, and
he is 72 years old. Larry received the first annuity payment of
$1,500 this month. Use the expected number of payments in Exhibit
5-1 for this problem. How much of the first payment should Larry
include in gross income?

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