Terry receives $3,000 annually from an annuity contract which she purchased in 2003 for $15,000.Her total expected return under the contract is $45,000 and payments under the contract began in 2004.For the years 2004 through 2013,Terry received $3,000 per year.Of the $3,000 received during 2013,what amount must Terry include in her gross income for 2013 under the general rule?

Question

Quizplus · Accepted Answer

Under the general rule, the taxable portion of an annuity payment is determined by the exclusion ratio, which is the investment in the contract divided by the expected return. Terry's exclusion ratio is $15,000/$45,000 = 1/3. Therefore, 1/3 of each $3,000 payment is a return of capital and not taxable, while 2/3 is taxable. Thus, $2,000 of the $3,000 received in 2013 is included in her gross income.

Terry Receives $3,000 Annually from an Annuity Contract Which She