In 2012, Todd purchased an annuity for $200,000.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?
A)Todd is not required to recognize any income until he has collected 80 payments (80 ´ $2,500 = $200,000).
B)If Todd collects 30 payments and then dies in 2014, Todd's estate should amend his tax returns for 2012 and 2013 and eliminate all of the reported income from the annuity for those years.
C)For each $2,500 payment received in the first year, Todd must include $2,000 in gross income.
D)For each $2,500 payment received in the first year, Todd must include $500 in gross income.
E)None of the above.

Question

Quizplus · Accepted Answer

The exclusion ratio is calculated as the investment in the contract ($200,000) divided by the expected return ($2,500 x 100 months = $250,000), which equals 0.8. Therefore, 80% of each payment is a return of capital and not taxable, leaving 20% ($500) as taxable income.

In 2012, Todd Purchased an Annuity for $200,000