**Understanding Annuities and Their Tax Implications**Herbert has made an important financial decision by purchasing a 10-year annuity for $96,000 late in the current year. This annuity will provide him with a steady income of $4,000 per month for the next ten years, starting on September 1 of the current year. With this new income source, a crucial question arises: **How much of the $16,000 received this year will be taxable?**This question is integral for anyone managing their finances and planning for retirement. Let's review the provided options and break down the problem:- $12,800- $16,000- $0- $3,200It's important to understand the principle behind how annuities are taxed. Generally, the taxable portion of annuity payments is determined by the exclusion ratio, which separates the portion of each payment that is a return of the initial investment (not taxable) and the portion that is considered earnings (taxable).### How to Calculate Taxable AmountGiven the options, let's assume a simplified approach to identify the correct answer:1. **Total Payments for the Year:** From September to December, Herbert will receive payments for 4 months. Therefore, the total received is $ 4 \times 4000 = \$16,000 $.2. **Exclude the Return on Investment:** We need to figure out how much of this payment is the return of the initial investment and how much is the interest. For an exact answer, we would use the excluded ratio formula, but this calculation goes beyond the provided multiple-choice options.3. **Simplified Approach:** Given that Herbert's total purchase was $96,000 for 10 years, with each year bringing him $ 12 \times 4000 = 48,000 $. Thus, an average exclusion per year can apply proportionately to the months in question.### Calculations:Without going deeper into exclusion ratio mathematics, a straightforward calculation would suffice considering the options provided. Here the approximation method would likely indicate one of the insightful options:- If we assume a simple return between investment and taxable earnings, “$3,200” could stand out as a potential option for the ratio involving earnings and returns.### ConclusionTherefore, in the given scenario, **$3,200** of the **$16,000** received might stand as the taxable portion for this year. For precise calculations, consulting tax

Introduction: The amount of income liable to tax after deductions and exemptions is known as taxable…

Herbert purchased a 10-year annuity for $96,000 late in the current year. The annuity will pay him $4,000 per month for ten years starting on September 1 of the current year. How much of the $16,000 received this year will be taxable? $12,800 $16,000 $0 $3,200

Herbert purchased a 10-year annuity for $96,000 late in the current year. The annuity will pay him $4,000 per month for ten years starting on September 1 of the current year. How much of the $16,000 received this year will be taxable? $12,800 $16,000 $0 $3,200

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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