Question

# Larry purchased an annuity from an insurance company that promises to pay him \$6,000 per month...

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?

#### Homework Answers

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

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