Flowers, a married taxpayer, purchased an annuity for $64,400 that will pay $700 per month over the life of Flowers and Flowers’s spouse. At the time of purchase, the couple’s joint life expectancy was 23 years. Flowers received payment beginning April 1, Year 1, amounting to $6,300 in the first year of the annuity contract. How much is includible in Flowers’s gross income in the first year?
Question
Flowers, a married taxpayer, purchased an annuity for 700 per month over the life of Flowers and Flowers’s spouse. At the time of purchase, the couple’s joint life expectancy was 23 years. Flowers received payment beginning April 1, Year 1, amounting to $6,300 in the first year of the annuity contract. How much is includible in Flowers’s gross income in the first year?
Solution
To calculate the amount includible in Flowers's gross income in the first year, we first need to determine the total expected return from the annuity.
Step 1: Calculate the total expected return The total expected return is the monthly payment amount multiplied by the number of months in the joint life expectancy. 192,600
Step 2: Calculate the exclusion ratio The exclusion ratio is the investment in the contract divided by the expected return. 192,600 = 0.334
Step 3: Calculate the annual exclusion The annual exclusion is the monthly payment multiplied by the number of months in a year, then multiplied by the exclusion ratio. 2,803.6
However, since Flowers only received payments for 9 months in the first year, we need to adjust the annual exclusion accordingly.
Step 4: Calculate the adjusted annual exclusion The adjusted annual exclusion is the annual exclusion multiplied by the fraction of the year that Flowers received payments. 2,102.7
Step 5: Calculate the amount includible in gross income The amount includible in gross income is the total amount Flowers received in the first year minus the adjusted annual exclusion. 2,102.7 = $4,197.3
Therefore, $4,197.3 is includible in Flowers's gross income in the first year.
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