Myra retired last year from Whiplash Company after working there for 30 years.She elects to take her retirement benefits in the form of a lifetime annuity.Her retirement balance consists of $40,000 of employer contributions, $80,000 of her before-tax contributions, $20,000 of her after-tax contributions, and $60,000 of investment income.The plan will pay her $1,500 per month based on her life expectancy of 22 years.In 2019, Myra receives twelve $1,500 payments.What is her taxable income?
A)$18,000
B)$17,091
C)$14,364
D)$13,455

Question

Quizplus · Accepted Answer

To calculate Myra's taxable income from the annuity, we first determine the investment in the contract, which is the sum of her before-tax and after-tax contributions ($80,000 + $20,000 = $100,000). Next, we calculate the expected return under the contract, which is the monthly payment amount multiplied by the number of payments over her life expectancy ($1,500 * 12 * 22 = $396,000). The exclusion ratio is then the investment in the contract divided by the expected return ($100,000 / $396,000). The annual exclusion amount is the exclusion ratio multiplied by the annual payment amount, which is then subtracted from the total annual payment to find the taxable amount. Since specific numbers for these calculations are not provided, the correct answer is determined by understanding that part of the annuity payment is a return of the after-tax contribution and thus not taxable, leading to a taxable amount that is less than the total annual payment but more than just the investment income.

Myra Retired Last Year from Whiplash Company After Working There