George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income?

Question

Quizplus · Accepted Answer

The exclusion ratio is calculated as the investment in the contract ($3,200) divided by the expected return ($80 x 100 months = $8,000), which is 0.4. Therefore, 40% of each payment is excluded from income, and 60% is included. 60% of $80 is $48.

George Purchased a Life Annuity for $3,200 That Will Provide