7.24 Life Expectancy Tables

IRS unisex actuarial tables must be used if you made any investment in a commercial annuity contract after June 30, 1986. Generally, life expectancies are longer under the unisex tables than under the prior male-female tables. The unisex life expectancy table for single life annuities is IRS Table V from Publication 939, shown above in Table 7-2. The unisex table for ordinary joint life and last survivor annuities is Table VI, in IRS Publication 939.

If your entire investment was before July 1, 1986, you use the older male/female tables. The tables, IRS Tables I through IV, are in Publication 939. Table I, shown above, is for single life expectancies. Table II, for ordinary joint life and last survivor annuities, is in Publication 939.

You may make an irrevocable election to use the unisex tables for all payments received under the contract, even if you did not make an investment after June 30, 1986.

If you invested in the contract both before July 1, 1986, and after June 30, 1986, and you are the first person to receive annuity payments under the contract, you may make a special election to use the prior tables for the pre–July 1986 investment and the unisex tables for the post–June 1986 investment. See IRS Publication 939 for further information. Treasury Regulation 1.72-6(d) has examples showing how to figure the post–June 1986 and pre–July 1986 investments.

Birthday nearest annuity starting date.

In looking up single life or joint life expectancy in the applicable table, use your age (and the age of a joint annuitant) at the birthday nearest to the annuity starting date. The number in the table next to this age is the life expectancy multiple used to figure the tax-free and taxable portions of a monthly annuity; see the following Examples.

Adjustments for nonmonthly payments.

An adjustment is required when your annuity payments are received quarterly, semiannually, or annually; see Example 3 below.

EXAMPLES
1. Bill Jones had his 66th birthday on April 14, 2012. On May 1, 2012, he received his first monthly annuity check of $1,000. This covered his annuity payment for April. Bill’s annuity starting date was April 1, 2012, and his entire investment was before July 1, 1986.
Looking at Table I in Table 7-2 under “Male” at age 66 (age on birthday nearest April 1 starting date), Bill finds the multiple 14.4. (He does not have to adjust that multiple because the payments are monthly.) Bill multiplies the 14.4 by $12,000 ($1,000 a month for a year) to find his expected return of $172,800. Assume there is no refund feature and Bill’s net investment (Step 1 at 7.23) is $129,600. He divides his expected return into the net investment and gets his exclusion percentage of 75%. Until Bill recovers his net cost, he receives tax free 75% of his annuity payments and is taxable on 25%. In 2012, Bill receives $8,000 ($1,000 in May through December) and reports $2,000 as the taxable amount:
Amount received $8,000
Amount excludable (75%)   6,000
Taxable portion $2,000
For 2013, Bill will receive annuity payments for the full year. The amount received will be $12,000; amount excludable, $9,000; and taxable portion, $3,000. The excludable and taxable portions will remain the same in later years until Bill has excluded his net cost of $129,600. After that, the annuity payments will be fully taxable.
2. Same facts as in Example 1 except there was an investment after June 30, 1986, and Table V is used. Looking at Table V (in Table 7-2) under age 66, Bill finds the multiple 19.2. The same multiple applies to males and females. Multiplying the 19.2 by $12,000 gives an expected return of $230,400. Using a net investment of $129,600, the exclusion percentage is 56.25% ($129,600 ÷ $230,400). For 2012, Bill reports annuity income as follows:
Amount received $8,000
Amount excludable (56.25%)   4,500
Taxable portion $3,500
For 2013, $12,000 is received. The amount excludable will be $6,750 (56.25% × $12,000), and the taxable portion, $5,250. The same treatment will apply in later years until Bill has excluded his net cost of $129,600. Thereafter, all payments will be fully taxable.
3. You receive quarterly annuity payments. Your first payment comes on January 15, covering the first quarter of the year. Since the period between the starting date of January 1 and the payment date of January 15 is less than one month, you adjust the life expectancy multiple as shown in Table 7-3 above by adding 0.1. If the life expectancy multiple from the IRS table was 14.4, the adjusted multiple is 14.5.

Table 7-3 Multiple Adjustment Table

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