Publication 939

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## Taxation of Periodic Payments |

This section explains how the periodic payments you receive under
a pension or annuity plan are taxed under the General Rule. Periodic payments
are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a
period of time greater than one year (such as for 15 years or for life). These
payments are also known as
*amounts received as an annuity.
*

If you receive an amount from your plan that is a
(amount not received as an annuity), see
nonperiodic payment
Taxation of Nonperiodic Payments
in Publication 575. |

In general, you can recover your net cost of the pension or annuity
tax free over the period you are to receive the payments. The amount of each
payment that is more than the part that represents your net cost is taxable.
Under the General Rule, the part of each annuity payment that represents your
net cost is in the same proportion that your investment in the contract is to
your expected return. These terms are explained in the following discussions.

taxmap/pubs/p939-001.htm#TXMP4e05069d## Investment in the Contract |

In figuring how much of your pension or annuity is taxable under
the General Rule, you must figure your investment in the contract.

First, find your
*net cost
*of the contract as of the annuity starting date (defined later).
To find this amount, you must first figure the total premiums, contributions, or
other amounts paid. This includes the amounts your employer contributed if you
were required to include these amounts in income. It also includes amounts you
actually contributed (except amounts for health and accident benefits and
deductible voluntary employee contributions).

From this
**total cost
**you subtract:

taxmap/pubs/p939-001.htm#TXMP68c2075a- Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment.
- Any additional premiums paid for double indemnity or disability benefits.
- Any other tax-free amounts you received under the contract or plan before the later of the dates in (1).

## The annuity starting date |

is the later of the first day of the first period for which you
receive payment under the contract or the date on which the obligation under the
contract becomes fixed.

taxmap/pubs/p939-001.htm#TXMP5005906bOn January 1 you completed all your payments required under an
annuity contract providing for monthly payments starting on August 1, for the
period beginning July 1. The annuity starting date is July 1. This is the date
you use in figuring your investment in the contract and your expected return
(discussed later).

taxmap/pubs/p939-001.htm#TXMP3ca229b2## Adjustments |

If any of the following items apply, adjust (add or subtract)
your total cost to find your net cost.

taxmap/pubs/p939-001.htm#TXMP2c2bf10d## Foreign employment. |

If you worked abroad, your cost includes amounts contributed
by your employer that were not includible in your gross income. The
contributions that apply were made either:

taxmap/pubs/p939-001.htm#TXMP036c8dd2## Death benefit exclusion. |

If you are the
*beneficiary
*of a deceased employee (or former employee), who died
*before
*August 21, 1996, you may qualify for a death benefit exclusion
of up to $5,000. The beneficiary of a deceased employee who died after August
20, 1996, will not qualify for the death benefit exclusion.

taxmap/pubs/p939-001.htm#TXMP78e1f48fHow to adjust your total cost. |

If you are eligible, treat the amount of any allowable death
benefit exclusion as additional cost paid by the employee. Add it to the cost or
unrecovered cost of the annuity at the annuity starting date. See
*Example 3
*under
*Computation Under General Rule
*for an illustration of the adjustment to the cost of the contract.

taxmap/pubs/p939-001.htm#TXMP00a764a8Free IRS help. |

If you are eligible for this exclusion and need help computing
the amount of the death benefit exclusion, see
*Requesting a Ruling on Taxation of Annuity,
*near the end of this publication.

taxmap/pubs/p939-001.htm#TXMP5ec2a71dNet cost. |

Your total cost plus certain adjustments and minus other amounts
already recovered before the annuity starting date is your net cost. This is the
unrecovered investment in the contract as of the annuity starting date. If your
annuity starting date is after 1986, this is the maximum amount that you may
recover tax free under the contract.

taxmap/pubs/p939-001.htm#TXMP35220c89## Refund feature. |

Adjustment for the value of the refund feature is only applicable
when you report your pension or annuity under the General Rule. Your annuity
contract has a refund feature if:

- The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals,
- The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and
- The payments are a refund of the amount you paid for the annuity contract.

If your annuity has a refund feature, you must reduce your net
cost of the contract by the value of the refund feature (figured using Table III
or VII at the end of this publication, also see
*How To Use Actuarial Tables,
*later) to find the investment in the contract.

taxmap/pubs/p939-001.htm#TXMP5cc83743Zero value of refund feature. |

For a joint and survivor annuity, the value of the refund feature
is
*zero
*if:

For a single-life annuity without survivor benefit, the value
of the refund feature is
**zero** if:

If you do not meet these requirements, you will have to figure
the value of the refund feature, as explained in the following discussion.

taxmap/pubs/p939-001.htm#TXMP291b2bb6The first example shows how to figure the value of the refund
feature when there is only one beneficiary. Example 2 shows how to figure the
value of the refund feature when the contract provides, in addition to a whole
life annuity, one or more temporary life annuities for the lives of children. In
both examples, the taxpayer elects to use Tables V through VIII. If you need the
value of the refund feature for a joint and survivor annuity, write to the
Internal Revenue Service as explained under
*Requesting a Ruling on Taxation of Annuity,
*near the end of this publication.

taxmap/pubs/p939-001.htm#TXMP6a8354ccAt age 65, Barbara bought for $21,053 an annuity with a refund
feature. She will get $100 a month for life. Barbara's contract provides that if
she does not live long enough to recover the full $21,053, similar payments will
be made to her surviving beneficiary until a total of $21,053 has been paid
under the contract. In this case, the contract cost and the total guaranteed
return are the same ($21,053). Barbara's investment in the contract is figured
as follows:

Net cost | $21,053 | |

Amount to be received annually | $1,200 | |

Number of years for which payment is guaranteed ($21,053 divided by $1,200) | 17.54 | |

Rounded to nearest whole number of years | 18 | |

Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments | 15% | |

Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 | 3,158 | |

Investment in the contract, adjusted for value of refund
feature | $17,895 | |

If the total guaranteed return were less than the $21,053 net
cost of the contract, Barbara would apply the appropriate percentage from the
tables to the lesser amount. For example, if the contract guaranteed the $100
monthly payments for 17 years to Barbara's estate or beneficiary if she were to
die before receiving all the payments for that period, the total guaranteed
return would be $20,400 ($100 × 12 × 17 years). In this case, the
value of the refund feature would be $2,856 (14% of $20,400) and Barbara's
investment in the contract would be $18,197 ($21,053 minus $2,856) instead of
$17,895.

taxmap/pubs/p939-001.htm#TXMP58e0c045John died while still employed. His widow, Eleanor, age 48, receives
$171 a month for the rest of her life. John's son, Elmer, age 9, receives $50 a
month until he reaches age 18. John's contributions to the retirement fund
totaled $7,559.45, with interest on those contributions of $1,602.53. The
guarantee or total refund feature of the contract is $9,161.98 ($7,559.45 plus
$1,602.53).

The adjustment in the investment in the contract is figured as
follows:

taxmap/pubs/p939-001.htm#TXMP0a0871a0A) | Expected return:* | |||

1) | Widow's expected return: | |||

Annual annuity ($171 × 12) | $2,052 | |||

Multiplied by factor from Table V | ||||

(nearest age 48) | 34.9 | $71,614.80 | ||

2) | Child's expected return: | |||

Annual annuity ($50 × 12) | $600 | |||

Multiplied by factor from | ||||

Table VIII (nearest age 9 | ||||

for term of 9 years) | 9.0 | 5,400.00 | ||

3) | Total expected return | $77,014.80 | ||

B) | Adjustment for refund feature: | |||

1) | Contributions (net cost) | $7,559.45 | ||

2) | Guaranteed amount (contributions of $7,559.45 plus interest of $1,602.53) | $9,161.98 | ||

3) | Minus: Expected return under child's (temporary life) annuity (A(2)) | 5,400.00 | ||

4) | Net guaranteed amount | $3,761.98 | ||

5) | Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761.98 at $171 a month to nearest whole year)) | 0% | ||

6) | Adjustment required for value of refund feature rounded to
the nearest whole dollar
(0% × $3,761.98, the smaller of B(3) or B(6)) | 0 | ||

*Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. See the discussion of expected return, later in this publication. |

Free IRS help. |

If you need to request assistance to figure the value of the
refund feature, see
*Requesting a Ruling on Taxation of Annuity,
*near the end of this publication.

taxmap/pubs/p939-001.htm#TXMP5a4b2382## Expected Return |

Your expected return is the total amount you and other eligible
annuitants can expect to receive under the contract. The following discussions
explain how to figure the expected return with each type of annuity.

A person's age, for purposes of figuring the expected return,
is the age at the birthday nearest to the annuity starting date. |

## Fixed period annuity. |

If you will get annuity payments for a fixed number of years,
without regard to your life expectancy, you must figure your expected return
based on that fixed number of years. It is the total amount you will get
beginning at the annuity starting date. You will receive specific periodic
payments for a definite period of time, such as a fixed number of months (but
not less than 13). To figure your expected return, multiply the fixed number of
months for which payments are to be made by the amount of the payment specified
for each period.

taxmap/pubs/p939-001.htm#TXMP299d5d04## Single life annuity. |

If you are to get annuity payments for the rest of your life,
find your expected return as follows. You must multiply the amount of the annual
payment by a multiple based on your life expectancy as of the annuity starting
date. These multiples are set out in actuarial Tables I and V near the end of
this publication (see
*How To Use Actuarial Tables,
*later).

You may need to adjust these multiples if the payments are made
quarterly, semiannually, or annually. See
*Adjustments to Tables I, II, V, VI, and VIA
*following Table I.

taxmap/pubs/p939-001.htm#TXMP6ae60fd4Henry bought an annuity contract that will give him an annuity
of $500 a month for his life. If at the annuity starting date Henry's nearest
birthday is 66, the expected return is figured as follows:

If the payments were to be made to Henry quarterly and the first
payment was made one full month after the annuity starting date, Henry would
adjust the 19.2 multiple by +.1. His expected return would then be $115,800
($6,000 × 19.3).

taxmap/pubs/p939-001.htm#TXMP0bde45a5Annual payment ($500 × 12 months) | $6,000 |

Multiple shown in Table V, age 66 | × 19.2 |

Expected return | $115,200 |

## Annuity for shorter of life or specified period. |

With this type of annuity, you are to get annuity payments either
for the rest of your life
**or
**until the end of a specified period, whichever period is shorter.
To figure your expected return, multiply the amount of your annual payment by a
multiple in Table IV or VIII for temporary life annuities. Find the proper
multiple based on your sex (if using Table IV), your age at the annuity starting
date, and the nearest whole number of years in the specified period.

taxmap/pubs/p939-001.htm#TXMP061c30a1Harriet purchased an annuity this year that will pay her $200
each month for five years or until she dies, whichever period is shorter. She
was age 65 at her birthday nearest the annuity starting date. She figures the
expected return as follows:

Annual payment ($200 × 12 months) | $2,400 |

Multiple shown in Table VIII, age 65, 5-year term | × 4.9 |

Expected return | $11,760 |

She uses Table VIII (not Table IV) because all her contributions
were made after June 30, 1986. See
Special Elections,
later. |

## Joint and survivor annuities. |

If you have an annuity that pays you a periodic income for life
and after your death provides an
*identical
*lifetime periodic income to your spouse (or some other person),
you figure the expected return based on your combined life expectancies. To
figure the expected return, multiply the annual payment by a multiple in Table
II or VI based on your joint life expectancies. If your payments are made
quarterly, semiannually, or annually, you may need to adjust these multiples.
See
*Adjustments to Tables I, II, V, VI, and VIA
*following Table I near the end of this publication.

taxmap/pubs/p939-001.htm#TXMP6de8e5a8John bought a joint and survivor annuity providing payments of
$500 a month for his life, and, after his death, $500 a month for the remainder
of his wife's life. At John's annuity starting date, his age at his nearest
birthday is 70 and his wife's at her nearest birthday is 67. The expected return
is figured as follows:

taxmap/pubs/p939-001.htm#TXMP5dc2e1f1Annual payment ($500 × 12 months) | $6,000 |

Multiple shown in Table VI, ages 67 and 70 | × 22.0 |

Expected return | $132,000 |

## Different payments to survivor. |

If your contract provides that payments to a survivor annuitant
will be
*different
*from the amount you receive, you must use a computation which
accounts for both the joint lives of the annuitants and the life of the
survivor.

taxmap/pubs/p939-001.htm#TXMP7d8a8df1Gerald bought a contract providing for payments to him of $500
a month for life and, after his death, payments to his wife, Mary, of $350 a
month for life. If, at the annuity starting date, Gerald's nearest birthday is
70 and Mary's is 67, the expected return under the contract is figured as
follows:

taxmap/pubs/p939-001.htm#TXMP5a647319Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI) | 22.0 | |

Multiple for Gerald, age 70 (from Table V) | 16.0 | |

Difference: Multiple applicable to Mary | 6.0 | |

Gerald's annual payment ($500 × 12) | $6,000 | |

Gerald's multiple | 16.0 | |

Gerald's expected return | $96,000 | |

Mary's annual payment ($350 × 12) | $4,200 | |

Mary's multiple | 6.0 | |

Mary's expected return | 25,200 | |

Total expected return under the contract | $121,200 |

Your husband died while still employed. Under the terms of his
employer's retirement plan, you are entitled to get an immediate annuity of $400
a month for the rest of your life or until you remarry. Your daughters, Marie
and Jean, are each entitled to immediate temporary life annuities of $150 a
month until they reach age 18.

You were 50 years old at the annuity starting date. Marie was
16 and Jean was 14. Using the multiples shown in Tables V and VIII at the end of
this publication, the total expected return on the annuity starting date is
$169,680, figured as follows:

Widow, age 50 (multiple from Table V—33.1 × $4,800 annual payment) | $158,880 |

Marie, age 16 for 2 years duration (multiple from Table VIII—2.0 × $1,800 annual payment) | 3,600 |

Jean, age 14 for 4 years duration (multiple from Table VIII—4.0 × $1,800 annual payment) | 7,200 |

Total expected return | $169,680 |

No computation of expected return is made based on your husband's
age at the date of death because he died before the annuity starting date.

taxmap/pubs/p939-001.htm#TXMP60a352a3## Computation Under |

Under the General Rule, you figure the taxable part of your annuity
by using the following steps:

taxmap/pubs/p939-001.htm#TXMP6ce86f3c## Step 1. |

Figure the amount of your investment in the contract, including
any adjustments for the refund feature and the death benefit exclusion, if
applicable. See
*Death benefit exclusion*, earlier.

taxmap/pubs/p939-001.htm#TXMP2cb6b8ce## Step 2. |

Figure your expected return.

taxmap/pubs/p939-001.htm#TXMP2f282513## Step 3. |

Divide Step 1 by Step 2 and round to three decimal places. This
will give you the
*exclusion percentage.*

taxmap/pubs/p939-001.htm#TXMP6e0bd99b## Step 4. |

Multiply the
*exclusion percentage
*by the first regular periodic payment. The result is the tax-free
part of each pension or annuity payment.

The tax-free part remains the same even if the total payment
increases or you outlive the life expectancy factor used. If your annuity
starting date is after 1986, the total amount of annuity income that is tax free
over the years cannot exceed your net cost.

Each annuitant applies the same exclusion percentage to his or
her initial payment called for in the contract.

taxmap/pubs/p939-001.htm#TXMP405648be## Step 5. |

Multiply the tax-free part of each payment (step 4) by the number
of payments received during the year. This will give you the tax-free part of
the total payment for the year.

In the first year of your annuity, your first payment or
part of your first payment may be for a fraction of the payment period. This
fractional amount is multiplied by your exclusion percentage to get the tax-free
part. |

## Step 6. |

Subtract the tax-free part from the total payment you received.
The rest is the taxable part of your pension or annuity.

taxmap/pubs/p939-001.htm#TXMP69c7167cYou purchased an annuity with an investment in the contract of
$10,800. Under its terms, the annuity will pay you $100 a month for life. The
multiple for your age (age 65) is 20.0 as shown in Table V. Your expected return
is $24,000 (20 × 12 × $100). Your cost of $10,800, divided by your
expected return of $24,000, equals 45.0%. This is the percentage you will not
have to include in income.

Each year, until your net cost is recovered, $540 (45% of $1,200)
will be tax free and you will include $660 ($1,200 − $540) in your income.
If you had received only six payments of $100 ($600) during the year, your
exclusion would have been $270 (45% of $100 × 6 payments).

taxmap/pubs/p939-001.htm#TXMP4caf3789Gerald bought a joint and survivor annuity. Gerald's investment
in the contract is $62,712 and the expected return is $121,200. The exclusion
percentage is 51.7% ($62,712 ÷ $121,200). Gerald will receive $500 a month
($6,000 a year). Each year, until his net cost is recovered, $3,102 (51.7% of
his total payments received of $6,000) will be tax free and $2,898 ($6,000
− $3,102) will be included in his income. If Gerald dies, his wife will
receive $350 a month ($4,200 a year). If Gerald had not recovered all of his net
cost before his death, his wife will use the same exclusion percentage (51.7%).
Each year, until the entire net cost is recovered, his wife will receive
$2,171.40 (51.7% of her payments received of $4,200) tax free. She will include
$2,028.60 ($4,200 − $2,171.40) in her income tax return.

taxmap/pubs/p939-001.htm#TXMP01cf70b2Using the same facts as Example 2 under
*Different payments to survivor,
*you are to receive an annual annuity of $4,800 until you die
or remarry. Your two daughters each receive annual annuities of $1,800 until
they reach age 18. Your husband contributed $25,576 to the plan. You are
eligible for the $5,000 death benefit exclusion because your husband died before
August 21, 1996.
**Adjusted Investment in the Contract**

Contributions | $25,576 |

Plus: Death benefit exclusion | 5,000 |

Adjusted investment in the contract | $30,576 |

The total expected return, as previously figured (in Example
2 under
*Different payments to survivor),*
is $169,680. The exclusion percentage of 18.0% ($30,576 ÷ $169,680) applies
to the annuity payments you and each of your daughters receive. Each full year
$864 (18.0% × $4,800) will be tax free to you, and you must include $3,936
in your income tax return. Each year, until age 18, $324 (18.0% × $1,800)
of each of your daughters' payments will be tax free and each must include the
balance, $1,476, as income on her own income tax return.

taxmap/pubs/p939-001.htm#TXMP4744a074## Part-year payments. |

If you receive payments for only part of a year, apply the exclusion
percentage to the first regular periodic payment, and multiply the result by the
number of payments received during the year. If you received a fractional
payment, follow Step 5, discussed earlier. This gives you the tax-free part of
your total payment.

taxmap/pubs/p939-001.htm#TXMP07dbdc74On September 28, Mary bought an annuity contract for $22,050
that will give her $125 a month for life, beginning October 30. The applicable
multiple from Table V is 23.3 (age 61). Her expected return is $34,950 ($125
× 12 × 23.3). Mary's investment in the contract of $22,050, divided by
her expected return of $34,950, equals 63.1%. Each payment received will consist
of 63.1% return of cost and 36.9% taxable income, until her net cost of the
contract is fully recovered. During the first year, Mary received three payments
of $125, or $375, of which $236.63 (63.1% × $375) is a return of cost. The
remaining $138.37 is included in income.

taxmap/pubs/p939-001.htm#TXMP5fa0017c## Increase in annuity payments. |

The tax-free amount remains the same as the amount figured at
the annuity starting date, even if the payment increases. All increases in the
installment payments are fully taxable.

taxmap/pubs/p939-001.htm#TXMP1ead32a8Joe's wife died while she was still employed and, as her beneficiary,
he began receiving an annuity of $147 per month. In figuring the taxable part,
Joe elects to use Tables V through VIII. The cost of the contract was $7,938,
consisting of the sum of his wife's net contributions, adjusted for any refund
feature. His expected return as of the annuity starting date is $35,280 (age 65,
multiple of 20.0 × $1,764 annual payment). The exclusion percentage is
$7,938 ÷ $35,280, or 22.5%. During the year he received 11 monthly payments
of $147, or $1,617. Of this amount, 22.5% × $147 × 11 ($363.83) is tax
free as a return of cost and the balance of $1,253.17 is taxable.

Later, because of a cost-of-living increase, his annuity payment
was increased to $166 per month, or $1,992 a year (12 × $166). The tax-free
part is still only 22.5% of the annuity payments as of the annuity starting date
(22.5% × $147 × 12 = $396.90 for a full year). The increase of $228
($1,992 − $1,764 (12 × $147)) is fully taxable.

taxmap/pubs/p939-001.htm#TXMP3bd1dd04## Variable annuities. |

For variable annuity payments, figure the amount of each payment
that is tax free by dividing your investment in the contract (adjusted for any
refund feature) by the total number of periodic payments you expect to get under
the contract.

If the annuity is for a definite period, you determine the total
number of payments by multiplying the number of payments to be made each year by
the number of years you will receive payments. If the annuity is for life, you
determine the total number of payments by using a multiple from the appropriate
actuarial table.

taxmap/pubs/p939-001.htm#TXMP2d44ae2aFrank purchased a variable annuity at age 65. The total cost
of the contract was $12,000. The annuity starting date is January 1 of the year
of purchase. His annuity will be paid, starting July 1, in variable annual
installments for his life. The tax-free amount of each payment, until he has
recovered his cost of his contract, is:

If Frank's first payment is $920, he includes only $320 ($920 − $600) in
his gross income.

Investment in the contract | $12,000 |

Number of expected annual payments (multiple for age 65 from Table V) | 20 |

Tax-free amount of each payment ($12,000 ÷ 20) | $600 |

If the
*tax-free amount for a year is more than the payments you receive
*in that year, you may choose, when you receive the next payment,
to refigure the tax-free part. Divide the amount of the periodic tax-free part
that is more than the payment you received by the remaining number of payments
you expect. The result is added to the previously figured periodic tax-free
part. The sum is the amount of each future payment that will be tax free.

taxmap/pubs/p939-001.htm#TXMP0e33c960Using the facts of the previous example about Frank, assume that
after Frank's $920 payment, he received $500 in the following year, and $1,200
in the year after that. Frank does not pay tax on the $500 (second year) payment
because $600 of each annual pension payment is tax free. Since the $500 payment
is less than the $600 annual tax-free amount, he may choose to refigure his
tax-free part when he receives his $1,200 (third year) payment, as follows:

taxmap/pubs/p939-001.htm#TXMP456a0932Amount tax free in second year | $600.00 |

Amount received in second year | 500.00 |

Difference | $100.00 |

Number of remaining payments after the first 2 payments (age 67, from Table V) | 18.4 |

Amount to be added to previously determined annual tax-free part ($100 ÷ 18.4) | $5.43 |

Revised annual tax-free part for third and later years ($600 + $5.43) | $605.43 |

Amount taxable in third year
($1,200 − $605.43)
| $594.57 |

If you choose to refigure your tax-free amount, |

you must file a statement with your income tax return stating
that you are refiguring the tax-free amount in accordance with the rules of
section 1.72–4(d)(3) of the Income Tax Regulations. The statement must
also show the following information:

taxmap/pubs/p939-001.htm#TXMP36e915d3- The annuity starting date and your age on that date.
- The first day of the first period for which you received an annuity payment in the current year.
- Your investment in the contract as originally figured.
- The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year.

## Exclusion Limits |

Your annuity starting date determines the total amount of annuity
income that you can exclude from income over the years.

taxmap/pubs/p939-001.htm#TXMP1a26984a## Exclusion limited to net cost. |

If your annuity starting date is after 1986, the total amount
of annuity income that you can exclude over the years as a return of your cost
cannot exceed your net cost (figured without any reduction for a refund
feature). This is the
*unrecovered investment in the contract
*as of the annuity starting date.

If your annuity starting date is after July 1, 1986, any unrecovered
net cost at your (or last annuitant's) death is allowed as a miscellaneous
itemized deduction on the final return of the decedent. This deduction is not
subject to the 2%-of-adjusted-gross-income limit.

taxmap/pubs/p939-001.htm#TXMP3a641c9bYour annuity starting date is after 1986. Your total cost is
$12,500, and your net cost is $10,000, taking into account certain adjustments.
There is no refund feature. Your monthly annuity payment is $833.33. Your
exclusion ratio is 12% and you exclude $100 a month. Your exclusion ends after
100 months, when you have excluded your net cost of $10,000. Thereafter, your
annuity payments are fully taxable.

taxmap/pubs/p939-001.htm#TXMP34392848The facts are the same as in Example 1, except that there is
a refund feature, and you die after 5 years with no surviving annuitant. The
adjustment for the refund feature is $1,000, so the investment in the contract
is $9,000. The exclusion ratio is 10.8%, and your monthly exclusion is $90.
After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60).
An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost
minus $5,400) may be taken on your final income tax return. Your unrecovered
investment is determined without regard to the refund feature adjustment,
discussed earlier, under
*Adjustments*.

taxmap/pubs/p939-001.htm#TXMP22974dcb## Exclusion not limited to net cost. |

If your annuity starting date was before 1987, you could continue
to take your monthly exclusion for as long as you receive your annuity. If you
choose a joint and survivor annuity, your survivor continues to take the
survivor's exclusion figured as of the annuity starting date. The total
exclusion may be more than your investment in the contract.

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