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 2013,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 the taxable portion of Myra's annuity, we need to use the Simplified Method. First, we must determine the total expected return from the annuity. We do this by multiplying the monthly payment by the number of months in Myra's life expectancy:

$1,500 x 12 months x 22 years = $396,000

Next, we need to determine the exclusion ratio, which is based on Myra's investment in the contract. This is calculated by dividing Myra's after-tax contributions by the expected return:

$20,000 ÷ $396,000 = 0.0505 or 5.05%

This means that 5.05% of each monthly payment is a tax-free return of Myra's after-tax contributions, and the remaining portion is taxable income.

To calculate the amount of each payment that is taxable income, we multiply the monthly payment by the complement of the exclusion ratio:

$1,500 x (1 - 0.0505) = $1,417.95

So, Myra's taxable income for each monthly payment is $1,417.95. Multiply that by 12 payments equals $17,015.40, which rounds up to $17,091. Therefore, the best choice for Myra's taxable income is B.

Myra Retired Last Year from Whiplash Company After Working There