Penny, age 45, purchased an annuity contract that cost $45,000. The contract will pay Penny $600 per month for 10 years after she reaches age 62. During the current year, Penny turns 62 and receives 4 payments under the contract. Penny's taxable income from the annuity payments is:
A)$900
B)$1,500
C)$1,708
D)$2,250
E)$2,400

Question

Quizplus · Accepted Answer

The exclusion ratio is calculated as the cost of the contract ($45,000) divided by the total expected return ($600 x 12 months x 10 years = $72,000), which is 0.625. Therefore, 62.5% of each payment is a return of principal and not taxable, while 37.5% is taxable. For 4 payments of $600, the taxable portion is 4 x $600 x 0.375 = $900.

Penny, Age 45, Purchased an Annuity Contract That Cost $45,000