Paolo is age 77.He paid $240,000 for a single life annuity contract that will pay him $43,200 per year for life.The tax-free amount of the first $43,200 payment is

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The tax-free portion of an annuity payment is calculated using the exclusion ratio, which is the investment in the contract divided by the expected return. Paolo's expected return is $43,200 times his life expectancy (based on IRS tables). The exclusion ratio is $240,000 divided by the expected return. Multiply this ratio by the annual payment to find the tax-free portion.

Paolo Is Age 77