Jay,a single taxpayer,retired from his job as a public school teacher in 2014.He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months.He contributed $36,000 to the pension plan during his 35-year career;so his adjusted basis is $36,000.Jay collected 192 payments before he died.What is the correct method for reporting the pension income?

Question

Quizplus · Accepted Answer

Jay is collecting under an annuity contract and the cost must be allocated among the payments received on the basis of the cost/expected return,until the total cost has been recovered.Thus,for each annuity payment received for the 180-month period,$200 [$36,000/($1,200 × 180)× $1,200] is excluded from gross income and $1,000 is included in gross income.Any payments received after the 180-month period are included in his gross income.

Jay,a Single Taxpayer,retired from His Job as a Public School