Determine the tax-free amount of the monthly payment in each of the following in

Question

Determine the tax-free amount of the monthly payment in each of the following instances.

Person A is age 59 and purchased an annuity for $95,000. The annuity pays $2,000 per month for life. (Round exclusion percentage computation to one decimal place.)

Person B is 63 and purchased an annuity for $93,000. The annuity pays $1,600 per month for life. (Round exclusion percentage computation to one decimal place. Round your final answer to 2 decimal places.)

Person C is 72 and purchased an annuity for $53,000 that pays a monthly payment of $1,200 for 10 years. (Round exclusion percentage computation to one decimal place. Round your final answer to 2 decimal places.)

Explanation / Answer

Now first of all we would find the multiple values (xpectd years of life) for each age from the IRS website

https://www.irs.gov/pub/irs-pdf/p939.pdf page 26.

We find the multiple as

Age - Multiple

59 yrs - 25 yrs

63 yrs – 21.6 yrs

72 yrs – 14.6 yrs (but we are given that the annuity policy is for 10 rs so we would use 10 yrs as multiple)

Next we calculate the total returns over the investment period. Mathematically it would be annual payout (monthly payout * 12) multiplied by Multiple yrs.

So total returns in each case:

=2000*12*25 = 600,000

=1600*12*21.6 = 414,720

=1200*12*10 = 144,000

But the initial amount invested in each of them were 95000; 93000 ; and 53000 respectively. Hence we calculate the exclusion factor as total investment divided by total returns

So exclusion factor in each case:

=95000/600000 = 15.83%

=93000/414720 = 22.42%

=53000/144000 = 36.81%

Hence this percentage of the annual payout in each case would be tax free. i.e.

15.83% of 2000*12 = $ 3800 annually or $ 316.67 monthly

22.42% of 1600*12 = $ 4306 annually or $ 358.80 monthly

36.81% of 1200*10 = $ 5300 annually or $ 441.67 monthly

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