Martin purchased an annuity contract at the beginning of 2002 for $84,000. The contract specifies that he will receive $2,000 per month for life. Martin receives his first payments on July 1, 2014, when he was 67 years old. Martin dies on August 15, 2019 (the August payment was received prior to his death). What amount, if any, should be deducted on Martin's 2019 tax return as a result of failing to receive his expected return on the annuity contract?
A)$54,400 can be claimed as a deduction on his final return.
B)$59,200 can be claimed as a deduction on his final return.
C)$1,600 can be claimed as a deduction on his final return.
D)No deduction is reported because a decedent is not required to file a final return.

Question

Quizplus · Accepted Answer

To calculate the amount that should be deducted on Martin's final tax return, we first need to determine the total expected payout from the annuity. Martin began receiving payments in July 2014, and he passed away in August 2019, which means he received 62 payments ($2,000/month x 62 months = $124,000).

However, Martin purchased the annuity for $84,000, which means the total expected payout was $84,000 / $2,000 per month = 42 months. So the remaining expected payments at the time of Martin's death are 42 - 62 = -20 months, meaning he had already received payments beyond the expected payout.

Therefore, there is no deduction for the remaining value of the annuity that can be claimed on Martin's final tax return. However, his estate may need to report the value of any remaining payments on Martin's final income tax return, and any taxes owed on the income would need to be paid by the estate.

The only deduction that would be allowed is for any funeral expenses that were paid by Martin's estate.

Martin Purchased an Annuity Contract at the Beginning of 2002