Calculating Exclusion Percentage and Gross Income for Annuity Purchases

What is the exclusion percentage for the taxpayer's annuity and how much is included in her gross income?

Given that a taxpayer, age 64, purchases an annuity from an insurance company for $74,000 and is to receive $617 per month for life, with a life expectancy of 20.8 years from the annuity starting date.

Exclusion Percentage: 59.83%

Included in Income: $49,970

The exclusion percentage for the taxpayer's annuity is 59.83%, and $49,970 is included in her gross income after applying the exclusion.

To calculate the exclusion percentage and the amount included in the taxpayer's gross income, we need to consider the cost recovery exclusion method. This method allows the taxpayer to exclude a portion of each annuity payment from their gross income until the cost of the annuity is fully recovered.

First, let's calculate the exclusion percentage:

Exclusion Percentage = (Investment in Annuity / Expected Return) * 100

Investment in Annuity = $74,000

Expected Return = Monthly Payment * Number of Payments

Monthly Payment = $617

Number of Payments = (Life Expectancy in Years - Current Age)

Current Age = 64

Life Expectancy = 20.8 years

Number of Payments = (20.8 - 64) = 16.8 years

Expected Return = $617 * (12 months/year) * 16.8 years = $123,573.60

Exclusion Percentage = (74,000 / 123,573.60) * 100 = 59.83%

Now, let's calculate the amount included in the taxpayer's gross income:

Amount Included in Income = Total Payments - Exclusion

Total Payments = Monthly Payment * Number of Payments

Number of Payments = (Life Expectancy in Years - Current Age) * 12 months/year

Number of Payments = 16.8 years * 12 months/year = 201.6 months

Total Payments = $617 * 201.6 = $124,249.20

Amount Included in Income = $124,249.20 - (59.83% * $124,249.20)

Amount Included in Income = $124,249.20 - $74,279.68 = $49,969.52

Therefore, the exclusion percentage is 59.83% and the amount included in the taxpayer's gross income is $49,970.