Juanita paid a life insurer $45,000 in exchange for an immediate life annuity.Juanita will receive $500 per month from the insurer,and her life expectancy is 15 years (180 months).Assume that Juanita receives 12 monthly payments of $500 the first year.How much taxable income must she report?

Question

Quizplus · Accepted Answer

The taxable income is calculated by subtracting the non-taxable portion of the annuity payments from the total payments received in a year. The non-taxable portion is determined by dividing the investment in the contract ($45,000) by the expected return (the monthly payment amount multiplied by the life expectancy in months, $500 * 180 = $90,000). This gives a ratio of $45,000 / $90,000 = 0.5 or 50%. Therefore, 50% of each payment is considered a return of investment and is not taxable. Over one year, Juanita receives 12 * $500 = $6,000. Half of this amount, or $3,000, is non-taxable, meaning the taxable income is the other half, $3,000.

Juanita Paid a Life Insurer $45,000 in Exchange for an Immediate