Patrick is entitled to receive monthly payments of $1,500 over his life from his employer's qualified pension plan or he can take $1,300 monthly over his life and the life of his wife.The payments begin January 1,2016.He contributed $85,250 to the plan prior to his retirement.Patrick is 64 and his wife is 62.Using the simplified method,how much of the payments will be included in Patrick's taxable income for 2016 if he chooses to take $1,300 monthly over his life and the life of his wife?

Question

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The simplified method uses the taxpayer's investment in the plan and the expected return over the payment period to determine the nontaxable portion of each payment. To calculate the taxable portion, the annual payment is multiplied by the expected return rate and then divided by the number of payments expected to be received.

In this case, Patrick's investment in the plan was $85,250. Using the simplified method, the expected return rate for someone who is 64 years old is 5.5%, and for someone who is 62 years old, it is 5.2%. The number of payments expected to be received is based on the taxpayer's and spouse's life expectancy, which is provided in IRS tables. In this case, the number of expected payments would be 276 for Patrick and 292 for his wife.

Using the formula, the taxable portion of each payment would be:

($1,300 x 0.052) / 292 = $23.46

So, the total taxable portion of the payments received in 2016 would be:

$23.46 x 12 = $281.52

Therefore, the answer is D) $12,300.

Patrick Is Entitled to Receive Monthly Payments of $1,500 Over