Question

Gramps purchased a joint survivor annuity that pays $1,150 monthly over his remaining life and that of his wife, Gram. Gramps is 70 years old and Gram is 65 years old. Gramps paid $191,268 for the contract. How much income will Gramps recognize on the first payment? Income recognized

Answer 1

Monthly payment for a joint survivor = 1150

Then annual payment is =1150× 12= 13800

Calculation of expected return:

Expected return= annual payment for joint survivor × annual return multiple for joint survivor

Annual return multiple for joint survivor is 23.1 (Table VI in reg, 1.72-9)

Expected rerun= 13800× 23.1= 318780

Calculation of return on capital and ordinary income

Return on capital= Amount paid for contract/expected return× 100

Return on capital= 191268/318780× 100= 60%

Ordinary income is 40% (100%-return on capital)

Note : after return on capital, balance is considered as ordinary income

Gramps recognize income on the first payment= monthly payment for joint survivor × Ordinary income in percentage

Gramps recognize income on the first payment= 1150×40%= 460