## When an annuitant annuitizes their annuity that has a cost basis in it, the amount of the income benefit payment subject to tax is determined by using the:AExclusion ratioBSuperannuation ratioCAnnuity ruleDException rule

### A: The Exclusion Ratio- The exclusion ratio allows the annuitant to account for the cost basis overtime so that the initial payments are not 100% taxable until all cost basis has been fully accounted for.

A. Exclusion ratio

When an annuitant chooses to annuitize their annuity that has a cost basis in it, the amount of the income benefit payment that is subject to taxation is determined by using the exclusion ratio. The exclusion ratio is a percentage calculated by dividing the investment in the annuity (the cost basis) by the expected payout of the annuity. The resulting percentage is the portion of each payment that will be considered a return of the annuitant’s cost basis and will not be taxed. The remaining portion of the payment will be considered taxable income.

For example, if an annuitant invests $100,000 in an annuity and expects to receive a total payout of $200,000, the exclusion ratio would be 50% (100,000/200,000). If the annuitant receives an income benefit payment of $10,000, then $5,000 (50% of $10,000) of the payment would be considered a return of their cost basis and would not be taxed. The remaining $5,000 would be considered taxable income.

The exclusion ratio applies only to annuities that have a cost basis, which means that the annuitant has contributed after-tax dollars to the annuity. Annuities that were funded entirely with pre-tax dollars, such as those held in a traditional IRA or 401(k), do not have a cost basis and are fully taxable upon distribution.

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