- 4 - income does not include that part of any amount received as an annuity which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date). Sec. 72(b)(1). This ratio is referred to as the exclusion ratio. Sec. 72(b). Section 72(c), as relevant here, defines the investment in the contract to be the aggregate amount of premiums or other consideration paid for the contract. The expected return referred to above is determined by multiplying, at the commencement of the annuity, the total of the annuity payments to be received annually by a multiple based on the annuitant’s age and sex. Sec. 1.72-5(a)(1), Income Tax Regs. The application of the exclusion ratio to each annuity payment determines the amount excluded from the gross income of the annuitant and, thus, the amount is not subject to Federal income tax. This excluded amount represents that part of the annuity payment which accounts for the return of the annuitant’s investment in the annuity. The exclusion ratio operates to exclude from gross income taxpayer contributions over the entire period of the annuity. Kirkland v. Commissioner, T.C. Memo. 1994-220. The tax-free portion of the pension annuity payment is computed using either the Simplified Method or the General Rule. See generally Internal Revenue Service Publication 575, Pension and Annuity Income, and Internal Revenue Service Publication 939, General Rule for Pensions and Annuities.Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011