Question

1. Pam retires after 28 years of service with her employer. She is 66 years old and has contributed $57,750 to her employer's qualified pension fund. She elects to receive her retirement benefits as an annuity of $5,775 per month for the remainder of her life.

a. Assume that Pam retired in June 2017 and collected six annuity payments that year. What is her income from the annuity payments in the first year?

$

b. Assume that Pam lives 25 years after retiring. What is her income from the annuity payments in the twenty-fourth year?

$

c. Assume that Pam dies after collecting 160 payments. She collected eight payments in the year of her death. What are Pam's income and deductions from the annuity contract in the year of her death?

Income from the annuity payments: $

Loss deduction: $

Answer 1

a. Assume that Pam retired in June 2017 and collected six annuity payments that year. What is her income from the annuity payments in the first year?
Investment	$ 57,750.00
Exclusion Per Payment = Cost of Investment/ Number of anticipated payments (Exhibit 4.2)
Exclusion Per Payment = $57,750/$210	$      275.00
Collections in 2017 (6 payments × $5,775)	$ 34,650.00
Exclusion for capital recovery = $275 x 6 payment	$   1,650.00
Include in gross income	$ 33,000.00
b. Assume that Pam lives 25 years after retiring. What is her income from the annuity payments in the twenty-fourth year?
Pam will have recovered her investment as a return of capital prior to the twenty-fourth year Thus, all annuity payments received in the twenty-fourth year ($5775 payments x 12)= 69300 are includible in her gross income.
c. Assume that Pam dies after collecting 160 payments. She collected eight payments in the year of her death. What are Pam's income and deductions from the annuity contract in the year of her death?
Income from the annuity payments: = ($5775 x 8) -(275 x 8) exclusion	$ 44,000.00
Investment	$ 57,750.00
Less: Capital recovered ($275 exclusion × 160 payments)	$ 44,000.00
Loss deduction:	$ 13,750.00