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At age 60, John Brown paid $40,000 to Worldwide Annuity Co. for an annuity to begin at age 65. John is to receive $400 per month until his death. If John has not received at least $40,000 in annuity payments by his death, Worldwide will pay his estate the difference between the amount of payments received and $40,000. John became 65 in April of this year, and, therefore, will receive 9 annuity payments of $400 each during the remainder of the year. How much of the annuity payments must be included in John’s gross income for this year?
Expert Answer
male age 65 elects a lifetime annuity and his investment in the contract is $40,000.
he has elected to receive Fixed Monthly annuity payments and the payment for the first year is $3,600. (9*400)
Applicable IRS tables indicate that such a person is expected to live 20 years.
The portion of each annuity payment excluded from income is $2,000, which is $40,000 divided by 20.
$2,000 of the $3,00 will be excluded from income and $1,600 will be included and taxable.
The $2,000 is excluded each year until the total investment in the contract has been received.
SeeTax annuity and IRS rule
