1. What is Annuity Exclusion Ratio?

The annuity exclusion ratio is a calculation used to determine what portion of annuity payments is considered a return of principal (non-taxable) versus earnings (taxable). It helps taxpayers properly report annuity income on their tax returns.

2. How Does the Calculator Work?

The calculator uses the annuity exclusion ratio formula:

Where:

• \( Basis \) — The total amount of after-tax money invested in the annuity
• \( Expected\ Return \) — The total expected return from the annuity over its payout period

Explanation: The ratio represents the percentage of each annuity payment that is considered a tax-free return of principal.

3. Importance of Annuity Exclusion Ratio

Details: Proper calculation of the exclusion ratio is essential for accurate tax reporting. It determines how much of each annuity payment is taxable income versus return of principal, helping taxpayers avoid underpayment or overpayment of taxes.

4. Using the Calculator

Tips: Enter the total basis (after-tax investment) and expected return amounts in dollars. Both values must be positive numbers. The calculator will compute the exclusion ratio as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is considered "basis" in an annuity?
A: The basis is the total amount of after-tax money you've invested in the annuity contract.

Q2: How is expected return calculated?
A: Expected return is typically calculated by multiplying the annual payment amount by the expected number of payments or life expectancy.

Q3: Does the exclusion ratio change over time?
A: Once calculated, the exclusion ratio generally remains constant throughout the payout period unless there are changes to the annuity contract.

Q4: What happens if I outlive my life expectancy?
A: Once you recover your entire basis, all subsequent payments become fully taxable as ordinary income.

Q5: Are there different rules for qualified vs non-qualified annuities?
A: Yes, qualified annuities (funded with pre-tax dollars) have different tax treatment where the entire payment is typically taxable until basis is recovered.