Jay, a Single Taxpayer, Retired from His Job as a Public

question 115

Multiple Choice

Jay, a single taxpayer, retired from his job as a public school teacher in 2017. He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months. He contributed $36,000 to the pension plan during his 35-year career; so his adjusted basis is $36,000. Jay collected 192 payments before he died. What is the correct method for reporting the pension income?

• A)Since Jay is no longer working, none of the pension payments must be included in his gross income.
• B)The first $36,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable.
• C)The first $180,000 he receives is taxable and the last $36,000 is a nontaxable recovery of capital.
• D)All of the last 12 payments he received ($14,400) are taxable.
• E)None of these.

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Definitions:

Principal-Agent Problem

An economic conflict where an individual (the agent) has the responsibility to act for the benefit of another party (the principal), but might fail to do so because of differing interests.

Representative Democracy

A form of government where citizens elect officials to represent their interests and make decisions on their behalf in the legislative process.

Private Business

A business entity owned and operated by private individuals, not controlled by the government, and aimed at earning profit.