Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?

Question

Quizplus · Accepted Answer

The exclusion ratio for an annuity is calculated by dividing the investment in the annuity by the expected return. In this case, the expected return is $48,000 per year ($12,000 per quarter for 10 years). The total expected return over the 10-year period is $480,000 ($48,000 per year x 10 years), so the exclusion ratio is $300,000 divided by $480,000, which equals 0.625. Therefore, only 62.5% of each payment will be excluded from Fran's gross income, and the other 37.5% will be taxable. The first quarterly payment of $12,000 will have $4,500 ($12,000 x 0.375) included in Fran's gross income.

Fran Purchased an Annuity That Provides $12,000 Quarterly Payments for the Next