462. How is the excludable portion of payments under an annuity with a single life refund or period-certain guarantee calculated?Stevenrcline202015-04-28T17:59:00Z2015-04-28T17:59:00Z410295866Summit Business Media4813688214Site Map/Annuities/Nonqualified/Amounts Received as an Annuity/Fixed Annuities/Life Annuity/Single2005-01-24T00:00:00ZTaxFactsDefaultArticle10011-00-TF1.xml11.00;#1584;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1How do you compute the excludable portion of payments under a single life annuity?126673500.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-19T08:05:50Z462. How is the excludable portion of payments under an annuity with a single life refund or period-certain guarantee calculated?The computation outlined in Q 461 is for a “life only” annuity (without a refund or period-certain guarantee). The exclusion ratio for a single life refund or period-certain guarantee is determined in the same way, but the investment in the contract first must be adjusted by subtracting the value of the refund or period-certain guarantee. The value of the refund or period-certain guarantee is computed by the following steps:(1)Determine the duration of the guaranteed amount (number of years necessary for the total guaranteed return to be fully paid). In the case of a period-certain life annuity, the duration of the guaranteed amount, in years, is known (e.g., ten, fifteen, or twenty “years certain”). To find the duration of the guaranteed amount, in years, for a cash or installment refund life annuity, divide the total guaranteed amount by the amount of one year’s annuity payments, and round the quotient to the nearest whole number of years.(2)Find the factor in Table III or VII (whichever is applicable, depending on when the investment is made in the contract) under the whole number of years (as determined above) and the age and (if applicable) the sex of the annuitant (see Appendix A). This Table III or Table VII factor is the percentage value of the refund or period-certain guarantee.(3)Apply the applicable Table III or Table VII percentage to the smaller of (a) the investment in the contract, or (b) the total guaranteed return under the contract. The result is the present value of the refund or period-certain guarantee.(4)Subtract the present value of the refund or period-certain guarantee from the investment in the contract. The remainder is the adjusted investment in the contract to be used in the exclusion ratio..Treas. Reg. §1.72-7(b).Example 3: On January 1, 2015, a husband, age sixty-five, purchases for $21,053 an immediate installment refund annuity that pays $100 a month for life. The contract provides that in the event the husband does not live long enough to recover the full purchase price, payments will be made to his wife until the total payments under the contract equal the purchase price. The investment in the contract is adjusted for the purpose of determining the exclusion ratio as follows:Unadjusted investment in the contract$ 21,053Amount to be received annually$ 1,200Duration of guaranteed amount ($21,053 ÷ $1,200)17.5 yrs.Rounded to nearest whole number of years18Percentage value of guaranteed refund (Table VII for age 65 and 18 years)15%Value of refund feature rounded to nearest dollar (15% of $21,053)$ 3,158Adjusted investment in the contract ($21,053 - $3,158)$ 17,895Example 4: Assume the contract in Example 3 was purchased as a deferred annuity, the pre-July 1986 investment in the contract is $10,000, and the post-June 1986 investment in the contract is $11,053. If the annuitant elects (as explained in Appendix A) to compute a separate exclusion percentage for the pre-July 1986 and the post-June 1986 amounts, separate computations must be performed to determine the adjusted investment in the contract. The pre-July 1986 investment in the contract and the post-June 1986 investment in the contract are adjusted for the purpose of determining the exclusion ratios in the following manner:Pre-July 1986 adjustment:Unadjusted investment in the contract$10,000Allocable part of amount to be received annually (($10,000 ÷ $21,053) x $1,200)$ 570Duration of guaranteed amount ($10,000 ÷ $570)17.5 yrs.Rounded to nearest whole number of years18Percentage in Table III for age 65 and 18 years30%Present value of refund feature rounded to nearest dollar (30% of $10,000)$ 3,000Adjusted pre-July 1986 investment in the contract ($10,000 - $3,000)$ 7,000Post-June 1986 adjustment:Unadjusted investment in the contract$11,053Allocable part of amount to be received annually (($11,053 ÷ $21,053) x $1,200)$ 630Duration of guaranteed amount ($11,053 ÷ $630)17.5 yrs.Rounded to nearest whole number of years18Percentage in Table VII for age 65 and 18 years15%Present value of refund feature rounded to nearest dollar) (15% of $11,053)$ 1,658Adjusted post-June 1986 investment in the contract ($11,053 - $1,658)$ 9,395Once the investment in the contract has been adjusted by subtracting the value of the refund or period-certain guarantee, an exclusion ratio is determined in the same way as for a straight life annuity. The expected return is computed, then the adjusted investment in the contract is divided by expected return. Taking the two examples above, the exclusion ratio for each contract is determined as follows.Example (3) above.Investment in the contract (adjusted for refund guarantee)$17,895One year's guaranteed annuity payments (12 x $100)$ 1,200Life expectancy from Table V, age 6520 yrs.Expected return (20 x $1,200)$24,000Exclusion ratio ($17,895 ÷ $24,000)74.6%Amount excludable from gross income each year in which 12 payments are received (74.6% of $1,200)*$895.20Amount includable in gross income ($1,200 - $895.20)*$304.80*Since the annuity starting date is after December 31, 1986, the total amount excludable is limited to the investment in the contract; after that has been recovered, the remaining amounts received are includable in income. However, if the annuity has a refund or guarantee feature, the value of the refund or guarantee feature is not subtracted when calculating the unrecovered investment..IRC Sec. 72(b)(4).Example (4) above.Pre-July 1986 investment in the contract (adjusted for period certain guarantee)$ 7,000One year's guaranteed annuity payments (12 x $100)$ 1,200Life expectancy from Table I, male age 6515 yrs.Expected return (15 x $1,200)$ 18,000Exclusion ratio ($7,000 ÷ $18,000)38.9% Post-June 1986 investment in the contract (adjusted for period certain guarantee)$ 9,395One year's guaranteed annuity payments (12 x $100)$ 1,200Life expectancy from Table V, age 6520 yrs.Expected return (20 x $1,200)$ 24,000Exclusion ratio ($9,395 ÷ $24,000)39.1%Sum of pre-July and post-June 1986 ratios78%Amount excludable from gross income each year in which twelve payments are received (78% of $1,200)*$ 936Amount includable in gross income ($1,200 - 936)*$ 264*Since the annuity starting date is after December 31, 1986, the total amount excludable is limited to the investment in the contract; after that has been recovered, the remaining amounts received are includable in income.