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Wallstreet Esq.
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Can a prepared example along with instructions of General

Customer Question

Can a prepared example along with instructions of General Rule Method that determines the tax free part of pensions be forwarded to my email address?
Submitted: 4 months ago.
Category: Tax
Expert:  Lane replied 4 months ago.

Hi,

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I'd have to make what's called an additional services offer here (done to protect anonymity on this public site) so that we will get the private link which allows for confidential sharing of contact info (such as phone and/or email).

Expert:  Lane replied 4 months ago.

While I'm waiting for your response , I cna outlin here ... this really isn't difficult

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The basic formula is as follows:

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Step 1. Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. See Death benefit exclusion , earlier.

Step 2. Figure your expected return.

Step 3. Divide Step 1 by Step 2 and round to three decimal places. This will give you the exclusion percentage.

Step 4. Multiply the exclusion percentage by the first regular periodic payment. The result is the tax-free part of each pension or annuity payment.

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Your excpected return is just the benefit x the multiple for your age (shown in IRS table V)

Expert:  Lane replied 4 months ago.

The example from the publication shows how simple this is:

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You purchased an annuity with an investment in the contract of $10,800. Under its terms, the annuity will pay you $100 a month for life. The multiple for your age (age 65) is 20.0 as shown in Table V. Your expected return is $24,000 (20 × 12 × $100). Your cost of $10,800, divided by your expected return of $24,000, equals 45.0%. This is the percentage you will not have to include in income.

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Expert:  Lane replied 4 months ago.

Looks like there's been a problem with the payment for your phone request ... I tried to accept

Expert:  Lane replied 4 months ago.

As another example:

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"The formula for determining the nontaxable portion of each year's payment is, according to the Internal Revenue Code Sec. 72(b)(1):

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Investment in the contract
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Expected return

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This is called the 'exclusion ratio.' It is expressed as a percentage (rounded to three decimal places) and applied to each annuity payment to find the portion of the payment that is excludable from gross income [Treas. Reg ?1.72-4(a)(2)].

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once you've recovered your investment (by excluding that part of the payment) your payment becomes fully taxable.

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Said diffferently, once you've actually lived past your actuarial life expectancy (20 years in the example above), 100% of each payment will be taxable."

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