Myra retired last year from Whiplash Company after working there for 30 years. She elects to take her retirement benefits in the form of a lifetime annuity. Her retirement balance consists of $40,000 of employer contributions, $80,000 of her before-tax contributions, $20,000 of her after-tax contributions, and $60,000 of investment income. The plan will pay her $1,500 per month based on her life expectancy of 22 years. In 2018, Myra receives twelve $1,500 payments. What is her taxable income?
A) $18,000
B) $17,091
C) $14,364
D) $13,455

Question

Quizplus · Accepted Answer

To calculate Myra's taxable income, we need to determine how much of each monthly payment is considered taxable income. This is based on the ratio of her contributions to the total retirement balance.

First, we need to determine the total retirement balance:

$40,000 (employer contributions) + $80,000 (before-tax contributions) + $20,000 (after-tax contributions) + $60,000 (investment income) = $200,000

Next, we need to determine the portion of each monthly payment that is considered a return of her contributions (not taxable). To do this, we divide her total contributions by the total retirement balance:

($80,000 + $20,000) / $200,000 = 0.5

This means that 50% of each monthly payment is considered a return of her contributions and not taxable. The remaining 50% is considered investment income and is taxable.

So, for each monthly payment of $1,500, Myra will have $750 that is not taxable and $750 that is taxable. In 2018, she received 12 such payments, so her total taxable income for the year is:

$750 (taxable portion of each payment) x 12 (number of payments) = $9,000

However, Myra also received investment income from her retirement balance. This investment income is also taxable. We can calculate the taxable portion of her investment income using the same ratio as before:

$60,000 (investment income) / $200,000 (retirement balance) = 0.3

This means that 30% of her investment income is taxable. So, her total taxable income for the year is:

$9,000 (taxable portion of monthly payments) + $18,000 (30% of investment income) = $17,091

Therefore, the best choice is B.

Myra Retired Last Year from Whiplash Company After Working There