Exclusion ratio

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The part of an annuity payment that is not subject to income tax.

To calculate the exclusion ratio for an annuity, the policyholder must multiply the monthly income amount by their life expectancy in months. Next, divide the total premium (lump sum) paid by the number previously calculated.

Example if: Premium of $100,000. Monthly annuity income is $600. Life expectancy at current age is 180 months.

600 x 120 = 108,000

100,000/108,000 = 0.926 = 92.6% exclusion ratio.

For this example, 92.6% ($555.60) of the annuity payment is excluded from income tax, leaving 7.4% ($44.40) subject to tax.

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