John, age 65, purchased an immediate variable life annuity, with a total investment of $200,000.
His life expectancy is 20 years according to IRS tables. In the first full year of the contract, he
received a total annuity payment of $12,000. How much of this payment will be income-tax-free for
John?
A) $10,000.
B) $2,000.
C) $6,000.
D) $12,000.
A) $10,000.
Since this is a variable annuity payment, the tax-free portion of each payment is calculated using the
following formula:
Tax-free portion of each annual payment = Total investment divided by Number of years payments will be
made
Therefore, his tax-free portion per payment is $10,000 ($200,000/20)
(this multiple choice question has been scrambled)