Florida 2-15 Life, Health and Variable Annuity AgentFlorida Laws and Regulations Specific to Life Insurance and AnnuitiesHard
A Florida resident purchases a non-qualified immediate annuity with a principal amount of $200,000. The annuity payout is $1,000 per month, and the annuitant's exclusion ratio is calculated at 80%. What portion of each monthly payment is considered taxable income?
- A$800
- B$0
- C$200
- D$1,000
Show answer & explanationAnswer & explanation
Correct answer: C. $200
The exclusion ratio determines the portion of each annuity payment that is considered a tax-free return of principal. If the exclusion ratio is 80%, then 80% of the $1,000 payment ($800) is tax-free. The remaining 20% ($200) is considered taxable earnings.
Why the other options are wrong
- A. This represents the tax-free portion of the payment, not the taxable portion.
- B. This would imply the entire payment is tax-free, which is incorrect for a non-qualified annuity with earnings.
- D. This would imply the entire payment is taxable, which is incorrect as part is return of principal.
Annuity Exclusion Ratio
The exclusion ratio for non-qualified annuities determines the percentage of each annuity payment that is considered a tax-free return of principal, with the remainder being taxable income.
- Applies to non-qualified annuities
- Calculated based on investment in contract vs. expected return
- Tax-free return of principal portion
- Taxable earnings portion
Memory trick: Exclusion Ratio: The part you Exclude from taxes, the rest is the Taxable slice!