Jerry purchased an annuity contract at the beginning of 2003 for $144,000. The contract specified that he and his wife would receive $1,000 per month for life. Jerry receives his first payment on February 1, 2014 when he is 59 years old and his wife is 56 years old. What amount of gross income should Jerry and his wife report on their 2014 income tax return from this annuity contract?
A) $ -0-
B) $ 4,400
C) $ 6,600
D) $11,000

Question

Quizplus · Accepted Answer

The exclusion ratio is calculated by dividing the investment in the contract ($144,000) by the expected return. The expected return is the annual payment ($12,000) multiplied by the joint life expectancy. Assuming a joint life expectancy of 30 years, the expected return is $360,000. The exclusion ratio is 40% ($144,000/$360,000). Therefore, 60% of the payments are taxable. In 2014, they received $11,000 ($1,000 x 11 months), so $6,600 (60% of $11,000) is taxable.

Jerry Purchased an Annuity Contract at the Beginning of 2003