Jerry purchased an annuity contract at the beginning of 2002 for $144,000.The contract specified that he and his wife would receive $1,000 per month for life.Jerry receives his first payment on February 1,2013 when he is 59 years old and his wife is 56 years old.What amount of gross income should Jerry and his wife report on their 2013 income tax return from this annuity contract?
A)$ -0-
B)$ 4,400
C)$ 6,600
D)$11,000

Question

Quizplus · Accepted Answer

The exclusion ratio is calculated as the investment in the contract ($144,000) divided by the expected return. The expected return is the annual payment ($12,000) multiplied by the joint life expectancy. Assuming a joint life expectancy of 30 years, the expected return is $360,000. The exclusion ratio is 144,000/360,000 = 0.4. Therefore, 40% of the annuity payments are excluded from income, and 60% is taxable. For 2013, they received $11,000, so $11,000 x 0.6 = $6,600 is taxable.

Jerry Purchased an Annuity Contract at the Beginning of 2002