Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy.In the first year, Carin collected $17,500 from the insurance company.She must include in gross income:

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The exclusion ratio is used to determine the taxable portion of each annuity payment received. It is calculated by dividing the investment in the contract (the premiums paid) by the expected return (the total amount to be received). Here, the investment in the contract is $60,000 (premiums paid by her husband), and the expected return is $175,000 (10 installments of $17,500 each). Each installment includes a nontaxable return of the investment in the contract and a taxable portion. The taxable portion of each $17,500 installment is calculated as follows: Total expected return ($175,000) minus investment in the contract ($60,000) equals $115,000 of total taxable amount over the term of the annuity. Since she receives $17,500 annually, the portion of each payment that exceeds the pro-rata investment in the contract is taxable. However, the specific calculation for the taxable portion per year is not directly provided in the options, but the principle that not all of the received amount is taxable is evident. Given the options and the information provided, the closest and most logical choice based on typical tax treatment would be to recognize a portion of each installment as taxable, suggesting that some of the $17,500 received annually exceeds the cost basis proportion and thus would be taxable. Without the exact calculation provided in the options, the principle that guides to the correct answer involves recognizing that part of each installment is a return of the non-taxable premium paid, and part is taxable income.

Carin, a Widow, Elected to Receive the Proceeds of a $150,000