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3 February, 15:40

taxpayer, age 64, purchases an annuity from an insurance company for $50,000. She is to receive $300 per month for life. Her life expectancy 20.8 years from the annuity starting date. Assuming that she receives $3,600 this year, what is the exclusion percentage and how much is included in her gross income?

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  1. 3 February, 15:44
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    The correct answer for exclusion percentage is 66.77% and for included in income in $1,196.

    Explanation:

    According to the scenario, the given data are as follows:

    Purchase value of annuity = $50,000

    Value receive per month = $300

    Expected life = 20.8 years

    So, the exclusion percentage and amount included in her gross income can be calculated by using following formula:

    First we calculate expected return in 20.8 years

    Expected Return = $300 x 12 months x 20.8 years

    = $74,880

    Now the exclusion percentage can be calculated as

    Exclusion percentage = Purchase value / Expected return

    = $50,000 / $74,880

    = 66.77%

    So, the exclusion amount will be

    Exclusion amount = Amount received in a year * exclusion percentage

    = $3,600 * 66.77%

    = $2,404

    So, the amount included in income can be calculate as:

    Included in Income = Amount received in a year - Exclusion amount

    = $3,600 - $2,404

    = $1,196
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