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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

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  1. 5 August, 05:00
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    Answer: $1091.61

    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
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