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# 3-2 - 41 Duc has been employed by Longbow Corporation for...

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41. Duc has been employed by Longbow Corporation for 25 years. During that time, he bought an annuity at a cost of \$50 per month (\$15,000 total cost). The annuity will pay him \$200 per month after he reaches age 65. When Duc dies, his wife, Annika, will continue to receive the annuity until her death. Duc turns 65 in April 2009 and receives 8 payments on the contract. Annika is age 60 when the annuity payments begin. a. How much gross income does Duc have from the contract in the current year? The nontaxable portion of an annuity payment is determined using the annuity exclusion ratio. To determine the monthly amount that can be excluded, the recipient divides their investment in the annuity by the number of months the annuity is expected to be received. Because Annika will continue to receive the annuity if Duc dies before her, the number of months the annuity is expected to be received is determined using the annuity table for more than one taxpayer (Table 3-2). Duc is age 65 and Annika is 60 (125 total years) when the annuity payments begin and the expected number of payments is 310. His monthly exclusion of \$48 (\$15,000 ÷ 310 months) represents the monthly return of their \$15,000 investment. Duc and Annika must include the remaining \$152 of each payment in gross income because it represents the return on their investment. Their 2009 gross income from the annuity is \$1,216 (\$152 x 8 payments): Monthly amount to be excluded: \$15,000 ÷ 310 = \$ 48 Taxable amount: \$200 - \$48 = \$ 152 b. Assume that Duc dies on April 2, 2019. How does Annika account for the contract in 2019? Because Annika continues to receive the annuity after Ducs death, she will continue to exclude \$48 of each payment and include \$152 in gross income. In 2019, Duc and Annika will include \$1,824 (\$152 x 12) in gross income. c. Assume the same facts as in part b and that Annika dies on August 4, 2026. How does the executor of Annika's estate account for the contract in the year of her death? The executor must include \$1,216 (\$152 x 8 payments) in 2026 gross income. Duc and Annika have received 208 [(17 years x 12) + 4 payments from May through August] of the 310 payments expected from the contract. Therefore, they have not recovered all of their \$15,000 investment. They have excluded only \$9,984 (\$48 x 208) and therefore are entitled to a deduction for the

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remaining \$5,016 (\$15,000 - \$9,984) of investment on Annika's 2026 return.
42. Hank retires this year after working 30 years for Local Company. Per the terms of his employment contract, Hank is to receive a pension of \$600 per month for the rest of his life. During the current year, he receives 7 pension payments from Local. At the time of his retirement, Hank is single and 67 years old. a. How much taxable income does Hank have if his employer's plan was

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3-2 - 41 Duc has been employed by Longbow Corporation for...

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