Annuity Exclusion Ratio Calculator

Calculate the portion of each annuity payment that is tax-free using the exclusion ratio method for retirement annuities.

Input Parameters

Calculation Results

Calculation Formula

Exclusion Ratio = Total Purchase Cost / (Fair Market Value × Estimated Life Expectancy)

Where:
- Exclusion Ratio is the portion of each annuity payment that is tax-free
- Total Purchase Cost is the amount paid for the annuity asset
- Fair Market Value is the value of the asset at the time of purchase
- Estimated Life Expectancy is the expected number of years the annuitant will receive payments

Annuity Exclusion Ratio Calculator Usage Guide

Learn how to use the Annuity Exclusion Ratio Calculator to optimize your retirement tax planning

What is the Annuity Exclusion Ratio?

The annuity exclusion ratio determines what portion of each annuity payment is tax-free. This ratio is based on the difference between what you paid for the annuity and what the annuity is worth at the time of purchase.

How to Use This Calculator

  1. Enter the Fair Market Value of Asset - This is what the annuity was worth at the time of purchase.
  2. Enter the Total Purchase Cost - This is how much you paid for the annuity.
  3. Enter the Estimated Life Expectancy - This is the expected number of years you'll receive payments from the annuity.
  4. Enter the Annual Annuity Payment - This is the amount you receive each year from the annuity.
  5. Click the Calculate button to see the results.

Understanding the Results

The calculator provides three key results:

  • Exclusion Ratio: A decimal representing the proportion of each payment that is tax-free.
  • Tax-Free Portion per Payment: The actual dollar amount of each payment that is not subject to income tax.
  • Taxable Portion per Payment: The dollar amount of each payment that is subject to income tax.

Example Scenario

Suppose you purchased an annuity for $200,000 with a fair market value of $150,000 and expected to receive $10,000 per year for 20 years. The exclusion ratio would be $200,000 / ($150,000 × 20) = 0.6667, meaning approximately 66.67% of each $10,000 payment is tax-free.

Important Considerations

The exclusion ratio remains constant throughout the annuity period. As a result, the tax-free portion of each payment stays the same, while the taxable portion also stays the same. This means that in the early years of receiving payments, you'll pay taxes on a larger portion of each payment, and in later years, a smaller portion will be taxed.