Betty purchased an annuity for $24,000 in 2017. Under the contract, Betty will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.
A)If Betty collects $3,000 in 2017, her gross income is $630 (.03 × $21,000).
B)Betty has no gross income until she has collected $24,000.
C)If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be included in taxable income.
D)If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity [$24,000 - (60 × $300) = $6,000] on her final return.
E)None of these.

Question

Quizplus · Accepted Answer

The annuity exclusion ratio allows Betty to exclude a portion of each payment from gross income until the total excluded amount equals her investment. If she lives beyond the expected 96 payments, subsequent payments are fully taxable.

Betty Purchased an Annuity for $24,000 in 2017