Taxpayer, age 64, purchases an annuity from an insurance company for $50,000. She is to receive $300 per month for life. Her life expectancy 20.8 years from the annuity starting date. Assuming that she receives $3,600 this year, what is the exclusion percentage and how much is included in her gross income?

The correct answer for exclusion percentage is 66.77% and for included in income in $1,196.

Explanation:

According to the scenario, the given data are as follows:

Purchase value of annuity = $50,000

Value receive per month = $300

Expected life = 20.8 years

So, the exclusion percentage and amount included in her gross income can be calculated by using following formula:

First we calculate expected return in 20.8 years

Expected Return = $300 x 12 months x 20.8 years

= $74,880

Now the exclusion percentage can be calculated as

Exclusion percentage =  Purchase value / Expected return

= $50,000 / $74,880

=  66.77%

So, the exclusion amount will be

Exclusion amount = Amount received in a year × exclusion percentage

= $3,600 × 66.77%

= $2,404

So, the amount included in income can be calculate as:

Included in Income = Amount received in a year - Exclusion amount

= $3,600 - $2,404

= $1,196