Answer:
If Larry outlives the IRS's life expectancy, he has two options:
- He must pay taxes for the full amount that he receives every month beginning with the 187th payment. The IRS allows you to deduct the cost of the annuity, but if you already discounted the full cost, then you start paying taxes for every cent that you get.
- Or he can recalculate his tax deduction. But recalculating when you are about to pass the age threshold doesn't make sense. After he turns 87, Larry will only be able to deduct $45,495.48 more. It sounds like a lot of money, but since the IRS doesn't recognize any interest on your investment, then the sooner you discount your taxes, the better.
Explanation:
According to the IRS, Larry's life expectancy is 15.5 more years (IRS publication 590, appendix b , table I: single life expectancy), so the total number of distributions = 15.5 x 12 = 186.
for tax purposes, he can deduct $1,410,360 / 186 = $7,582.58 from each distribution. This means that he will only have to pay income taxes for $11,500 - $7,582.58 = $3,917.42.
If Larry outlives the IRS's life expectancy, he has two options:
He must pay taxes for the full amount that he receives every month beginning with the 187th payment. The IRS allows you to deduct the cost of the annuity, but if you already discounted the full cost, then you start paying taxes for every cent that you get.
Or he can recalculate his tax deduction. But recalculating when you are about to pass the age threshold doesn't make sense. After he turns 87, Larry will only be able to deduct $45,495.48 more. It sounds like a lot of money, but since the IRS doesn't recognize any interest on your investment, then the sooner you discount your taxes, the better.
