CARD Q058
A nonqualified annuity has a $48,000 investment in the contract and $80,000 expected return. What fraction of each payment is initially excluded under the general exclusion-ratio method?
- 40%
- 60%
- 100%
- 0%
60%
Divide investment by expected return: $48,000 ÷ $80,000 = 60%. The exclusion is limited by applicable basis-recovery rules.
Why each choice is right or wrong
A. 40%
Incorrect. 40% is the initially taxable fraction, not the excluded fraction.
B. 60%
Correct. Divide investment by expected return: $48,000 ÷ $80,000 = 60%. The exclusion is limited by applicable basis-recovery rules.
C. 100%
Incorrect. The expected return exceeds basis, so not all payments are excluded.
D. 0%
Incorrect. There is basis to recover, so the excluded fraction is not zero.
Review the related terms
Use these lessons to revisit the concepts and try additional practice questions.