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 1,2014.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 2014 if he chooses to take $1,300 monthly over his life and the life of his wife?

Question

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To calculate the portion of the payments that is taxable, the simplified method involves dividing the total amount contributed to the plan ($85,250) by the expected number of monthly payments.

Using the mortality table provided by the IRS, the expected number of monthly payments for a 64-year-old male and a 62-year-old female is 320. Therefore, the portion of each monthly payment that is excluded from taxable income is:

$85,250 / 320 = $266.41

Since Patrick chose to take the $1,300 monthly payment, the amount that is excluded from taxable income is $266.41 x 1,300 = $346,333.

However, since the payments began in 2014, only the portion received in that year is taxable. Patrick received 12 payments of $1,300 in 2014, for a total of $15,600. To determine the taxable amount, subtract the excluded portion:

$15,600 - $346,333 = -$330,733

Since the result is negative, Patrick will not include any of the pension payments in his taxable income for 2014.

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