Question

Problem 4-51 (Algorithmic) (LO. 4) Pam retires after 28 years of service with her employer. She is 66 years old and has contributed $21,000 to her employer's qualified pension fund, all of which was taxable when earned. She elects to receive her retirement benefits as an annuity of $2,100 per month for the remainder of her life. Click here to access Exhiblt 4.1 and Exhibit 4.2. a. Assume that Pam retired in June 2019 and collected six annuity payments that year. What is her gross income from the annuity payments in the first year? b. Assume that Pam lives 25 years after retiring. What is her gross 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 gross Income and deductions from the annuity contract in the year of her death? Income from the annuity payments: $ Loss deduction:

Answer 1

Answer a) (Employee's investment / Number of anticipated payments) = 21000/210 = $100 exclusionper payment

Collections in 2019 = 6*2100 = $12,600

Less: Exclusion for capital recovery = 100*6 = $600

Gross income = $12,000

Answer b) Once the investment is recovered, the entire amount of subsequent payments is taxable.
Pam will have recovered her investment as a return of capital prior to the twenty-fifth year.

$21000/210=$100 (i.e., $21,000/$100 capital recovery = 210 months = 17 years and 5 months).

Thus, all annuity payments received in the current year ($50,400) are includible in her gross income.
$2,100 × 12 payments = $25,200

Answer c)

Investment in the contract = $21,000

Total amt collected (160*2100 = $336,000)

Less: Capital recovered (100 exclusion*160 payments) = $16,000

Unrecovered cost (loss) = $ 5,000

Income from collections in final year {16800 collected (2100*8) - 800 exclusion (8*100)} = $16,000