Question

Mark a calendar year taxpayer, purchased an annuity for $50,000 in 2012. The annuity was to pay him $3,000 on the first day of each year, beginning in 2012, for the remainder of his life. Mark's life expectancy at the time he purchased the annuity was 20 years. In 2014 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months. a. If Seth dies in 2015, a loss can be claimed on his final return for his unrecovered cost of the annuity. b. If Seth dies in 2015, his returns for the two previous years can be amended to allocate the entire cost of the annuity to the years in which he received payments and reported gross income. c. If Seth is still alive at the end of 2014, he is not required to recognize any gross income because of his terminal illness. d. If Seth is still alive in 2034, his recovery of capital for that year is $500. e. None of these.

Answer 1

Answer:

a. If Seth dies in 2015, a loss can be claimed on his final return for his unrecoverable cost of the annuity.

Explanation:

Fixed-Period Annuity

The fixed-period, or period-certain, annuity guarantees payments to the annuitant for a predetermined length of time. Some common options are 10, 15, or 20 years. In a fixed-amount annuity, the annuitant elects an amount to be paid each month until death or benefits are exhausted. If the annuitant dies before the defined benefit is paid, some plans provide for the remaining benefits to be paid to a beneficiary. This feature applies if either the full period has not yet elapsed or a balance remains on the account at the time of death, depending on the plan. However, if the annuitant outlives the fixed period or exhausts the account before death, no further payments are guaranteed. If the plan provides for the continuation of benefits, payments continue to be paid to the beneficiary until the predetermined period elapses or the balance reaches zero.