In 2015 Todd purchased an annuity for $150,000.The annuity is to pay him $2,500 per month for the rest of his life.His life expectancy is 100 months.Which of the following is correct?

Question

Quizplus · Accepted Answer

The exclusion ratio for annuities is calculated by dividing the cost of the annuity by the expected return. In this case, the expected return is $2,500 per month for Todd's life expectancy of 100 months, or $250,000. The exclusion ratio is therefore 150,000/250,000 or 0.6. For each $2,500 payment received, Todd must include $1,000 (0.4 x $2,500) in gross income. Option A is incorrect because Todd must recognize income based on the exclusion ratio, not the number of payments received. Option B is incorrect because Todd's estate would only need to amend his tax return for the year of his death to eliminate any remaining payments. Option D is incorrect because it incorrectly calculates the exclusion ratio.

In 2015 Todd Purchased an Annuity for $150,000