Exclusion Ratio

Exclusion Ratio

The percentage of an investor's return that is not subject to taxes. The exclusion ratio is a percentage with a dollar amount equal to the payback on one's initial investment. Any return above the exclusion ratio is subject to taxes. Most of the time, the exclusion ratio applies to non-qualified annuities.
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The insurance company will calculate the exclusion ratio, to facilitate tax return preparation.
To compute the annuity exclusion ratio, expected return is found by multiplying one year's annuity payments by a multiple from the appropriate IRS annuity table.
Also, because this is annuitization, the beneficiary has the benefit of the exclusion ratio treatment on distributions, with each payment being partially a tax-free return of principal and taxable interest.
In computing the exclusion ratio for the payments, the amount to be used as the investment in the contract is premium cost, not the maturity value.
In certain trading annuities, when income is to be turned on, there is a SPIA-like withdrawal benefit that offers an exclusion ratio.
Because the court in Wandry allowed a company to transfer business interests based upon the value of the then-applicable gift tax exclusion amount, instead of specifying that each of his children will receive a certain percentage of the business in each of ten years, Kevin can create a gift transfer document that transfers a portion of the business that equals the annual exclusion ratio for each year.
The exclusion ratio is determined by dividing the amount the employee previously included in income (i.
At that time, the group of Social Security recipients with the highest exclusion ratio was high-income, never-married males.
To calculate the annuity's exclusion ratio, the expected return is divided into the investment in the contract.
Thus, the tax advantages of annuities (tax-deferral during accumulation, exclusion ratio applied to withdrawals, tax-free exchanges, no required distributions if nonqualified) may take on greater appeal going forward.
Only dividends that were excludable from gross income are subtracted from gross premiums to determine the net premium cost used in determining the investment in the contract for purposes of the exclusion ratio.
The method used to determine the exclusion ratio depends upon the annuity starting date.