In 2010,Todd purchased an annuity for $180,000.The annuity is to pay him $2,000 per month for the rest of his life.His life expectancy is 150 months.Which of the following is correct?
A)Todd is not required to recognize any income until he has collected 90 payments (90 * $2,000 = $180,000).
B)If Todd collects 30 payments and then dies in 2012,Todd's estate should amend his tax returns for 2010 and 2011 and eliminate all of the reported income from the annuity for those years.
C)For each $2,000 payment received in the first year,Todd must include $1,200 in gross income.
D)For each $2,000 payment received in the first year,Todd must include $800 in gross income.
E)None of the above.

Question

Quizplus · Accepted Answer

The exclusion ratio for annuities is calculated by dividing the investment in the contract by the expected return. In this case, the investment is $180,000 and the expected return for 150 months at $2,000 per month is $300,000. Therefore, the exclusion ratio is 60% ($180,000/$300,000). For each $2,000 payment received, Todd must include 40% ($800) in gross income. Option A is incorrect because the exclusion ratio determines how much of the payment is taxable, not how many payments must be received before recognizing income. Option B is incorrect because Todd's estate would only amend tax returns for years in which income was reported and the exclusion ratio would still apply. Option C is incorrect because the exclusion ratio is applied to each payment, not just the first year.

In 2010,Todd Purchased an Annuity for $180,000