5 August, 03:33

# Fifteen years ago, Mr. Fairhold paid \$50,000 for a single-premium annuity contract. This year, he began receiving a \$1,300 monthly payment that will continue for his life. On the basis of his age, he can expect to receive \$312,000. How much of each monthly payment is taxable income to Mr. Fairhold

+3
1. 5 August, 05:00
0

Explanation:

From the question, we are told that fifteen years ago, Mr. Fairhold paid \$50,000 for a single-premium annuity contract and that this year, he began receiving a \$1,300 monthly payment that will continue for his life and based on his age, he can expect to receive \$312,000. The amount of each monthly payment is taxable income to Mr. Fairhold goes thus:

Based on the question, Mr Fairhold will have a tax free return of the \$50,000 paid. The exclusion ratio will be the investment divided by the expected return. This will be:

= \$50,000/\$312,000

= 0.1603

Since he received monthly payment of \$1,300 and exclusion ratio is 0.1603, the tax free return on investment will be:

= \$1,300 * 0.1603

= \$208.39

Taxable annuity payment will now be:

= \$1300 - \$208.39

= \$1091.61