Question
In: Accounting
3- please explain Determine the tax-free amount of the monthly payment in each of the following...
3- please explain
Determine the tax-free amount of the monthly payment in each of the following instances.
- Person A is age 66 and purchased an annuity for $91,000. The annuity pays $2,000 per month for life. (Round exclusion percentage computation to one decimal place.)
- Person B is 75 and purchased an annuity for $89,000. The annuity pays $1,400 per month for life. (Round exclusion percentage computation to one decimal place. Round your final answer to 2 decimal places.)
- Person C is 68 and purchased an annuity for $49,000 that pays a monthly payment of $1,000 for 12 years. (Round exclusion percentage computation to one decimal place. Round your final answer to 2 decimal places.)
What's the correct answer please provide examples?
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Solutions
Expert Solution
Option C is the correct answer in respect of person C.
Calculation of tax free portion
1.For person A,
A's age is 65, hence his life expectancy as per life expectancy chart is 20.2
Therefore expected return = 2000*(20.2*12)=484800
Hence, the exclusion % =91000*100/484800=18.77%
Tax Free portion = 2000*18.77%= $375.41 of each payment is tax free.
That is why this option is selected as incorrect as tax free payment is $ 375.41 not $ 479.75.
2. For Person B,
B's age is 75, hence his life expectancy as per life expectancy chart is 13.4
Therefore expected return = 1400*(13.4*12)=225120
Hence, the exclusion % =89000*100/225120=39.53%
Tax Free portion = 1400*39.53%= $553.42 of each payment is tax free.
That is why this option is selected as incorrect as tax free payment is $ 553.42 not $ 255.
3.For Person C,
B's age is 68, but he has taken policy for 12 years
Therefore expected return = 1000*(12*12)= 144000
Hence, the exclusion % =49000*100/144000=34.03%
Tax Free portion = 1000*34.03%= $340.28 of each payment is tax free.
That is why this option is selected as correct as tax free payment is $ 340.28.
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