George purchased a life annuity for $3,400 that will provide him $85 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $85 payment will George include in his gross income?

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Quizplus · Accepted Answer

The exclusion ratio is calculated as the investment in the contract ($3,400) divided by the expected return ($85 x 100 months = $8,500), which is $3,400/$8,500 = 0.4. Therefore, 40% of each payment is a return of capital and not taxable, so $85 x 0.4 = $34 is excluded. The taxable portion is $85 - $34 = $51.

George Purchased a Life Annuity for $3,400 That Will Provide