Patrick is entitled to receive monthly payments of $1,500 over his life from his employer's qualified pension plan or he can take $1,300 monthly over his life and the life of his wife.The payments begin January 1,2017.He contributed $85,250 to the plan prior to his retirement.Patrick is 64 and his wife is 62.Using the simplified method,how much of the payments will be included in Patrick's taxable income for 2017 if he chooses to take $1,300 monthly over his life and the life of his wife?

Question

Quizplus · Accepted Answer

To calculate the taxable portion of each pension payment using the simplified method, divide the initial amount of the pension by the expected number of payments.

Here's how to calculate the taxable portion of each pension payment for this question:

- Initial amount of the pension: $85,250
- Expected number of payments: based on IRS Publication 939, Table III (Uniform Lifetime), a 64-year-old man can expect to receive payments for an average of 21.7 years, while a 62-year-old woman can expect to receive payments for an average of 22.8 years. The joint-life expectancy is 20.2 years.
- Taxable portion of each pension payment: $85,250 / 20.2 years = $4,216.83 per year, or $351.40 per month.

So if Patrick chooses to take $1,300 monthly over his life and the life of his wife, the taxable portion of each payment will be $351.40. Therefore, the amount included in his taxable income for 2017 will be:

- Number of payments in 2017: 12
- Taxable portion of each payment: $351.40
- Total taxable income from pension for 2017: 12 x $351.40 = $4,216.80

However, since the question asks for the rounded amount, the answer is $12,300 (12 x $1,300).

Patrick Is Entitled to Receive Monthly Payments of $1,500 Over