Sam, a calendar year taxpayer, purchased an annuity contract for $3,600 that would pay him $120 a month beginning on January 1, 2016. His expected return under the contract based on his life expectancy is $10,800. Assuming Sam received a total of $1,440 in payments during 2016, how much of this annuity income is included in Sam’s gross income for 2016, using the general rule?
| $0 | ||||
| $480 | ||||
| $960 | ||||
| $1,440
General rule:
|
||||
| Can someone show how to get annuity income by using general rule above? Thanks. |
Cost of annuity = $3,600
Expeccted return from annuity = $10,800
Exclusion ratio = $3,600/$10,800 = 1/3
Hence, receipts reported as investment = $1,440*1/3 = $480
Receipt to be reported as income = $1,440 – $480 = $960
Hence, correct answer is $960
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