Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years.The annuity was purchased at a cost of $300,000.How much of the first quarterly payment will Fran include in her gross income?

Question

Quizplus · Accepted Answer

The portion of the annuity payment that is considered a return of capital is not included in gross income. The exclusion ratio is calculated as the cost of the annuity ($300,000) divided by the total expected return ($12,000 x 4 quarters x 10 years = $480,000), which is 0.625. Therefore, 62.5% of each payment is a return of capital, and 37.5% is taxable. $12,000 x 0.375 = $4,500 is included in gross income.

Fran Purchased an Annuity That Provides $12,000 Quarterly Payments for the Next