543 / How is the tax-exempt portion of payments determined for a joint and survivor annuity where the size of the payments will be reduced only if a specified annuitant dies first?

(1)     Find the joint and survivor multiple in Table II or VI (whichever is applicable, depending on when the investment in the contract was made) under the ages and (if applicable) the sexes of the annuitants. Then find the single life expectancy multiple in Table I or V, whichever is applicable, under the age and (if applicable) the sex of the first (specified) annuitant. Subtract the applicable Table I or Table V multiple from the applicable Table II or Table VI multiple, and multiply the amount payable annually to the second annuitant (the reduced payment) by the difference between the multiples.

(2)     Multiply the amount payable annually to the first annuitant by the Table I or Table V multiple (whichever is applicable).

(3)     Add the results of (1) and (2). This is the expected return under the contract.

Example. After June 30, 1986, two spouses, Spouse A and Spouse B, purchase a joint and survivor annuity providing payments of $100 a month for the life of Spouse A and, after his death, payments to Spouse B of $50 a month for life. As of the annuity starting date Spouse A is 70 years old and Spouse B is 67.

Assuming that the investment in the contract is $14,310, the exclusion ratio is 62.8 percent ($14,310 ÷
$22,800). While Spouse A lives, $62.80 of each monthly payment (62.8 percent of $100) is excluded from gross income, and the remaining $37.20 of each payment must be included in gross income. After Spouse A’s death, the surviving spouse will exclude $31.40 of each payment (62.8 percent of $50), and the remaining $18.60 of each payment will be includable in gross income. If the annuity starting date is after December 31, 1986, the total amount excludable is limited to the investment in the contract. Thus, if Spouse A lives 15 years and receives 180 payments, the unrecovered investment in the contract at his death is $3,006 ($14,310 – (180 × $62.80)). Spouse B can exclude $31.40 for 95 payments, and $23 from the next one payment ($3,006 – (95 × 31.40) = $23). Spouse B may exclude nothing thereafter.