471. What are the income tax results when an annuitant makes a partial lump sum withdrawal (i.e., a partial commutation) and takes a reduced annuity for the same?Stevenrcline202015-04-28T18:08:00Z2015-04-28T18:08:00Z12401368Summit Business Media113160514Site Map/Annuities/Nonqualified/Amounts Received as an Annuity/Fixed Annuities/Annuity Reduced by Partial Withdrawal2005-01-24T00:00:00ZTaxFactsDefaultArticle10020-00-TF1.xml20.00;#1578;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What are the income tax results when an annuitant makes a partial lump sum withdrawal and takes a reduced annuity for the same term or the same payments for a different term?127597900.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-15T00:16:08Z471. What are the income tax results when an annuitant makes a partial lump sum withdrawal (i.e., a partial commutation) and takes a reduced annuity for the remaining value of the contract?The nontaxable portion of the lump sum withdrawn is an amount that bears the same ratio to the unrecovered investment in the contract as the reduction in the annuity payment bears to the original payment. The original exclusion ratio will apply to the reduced payments; that is, the same percentage of each payment will be excludable from gross income..Treas. Reg. §1.72-11(f).Example. Mr. Gray pays $20,000 for a life annuity paying him $100 a month. At the annuity starting date his life expectancy is twenty years. His total expected return is therefore $24,000 (20 × $1,200), and the exclusion ratio for the payment is five-sixths ($20,000/$24,000). He receives annuity payments for five years (a total of $6,000) and excludes a total of $5,000 ($1,000 a year) from gross income. At the beginning of the next year, Mr. Gray agrees with the insurer to take a reduced annuity of $75 a month and a lump sum cash payment of $4,000. He will continue to exclude five-sixths of each annuity payment from gross income; that is, $62.50 (5/6 of $75). Of the lump sum, he will include $250 in gross income and exclude $3,750, determined as follows:Investment in the contract$20,000Less amounts previously excluded5,000Unrecovered investment$15,000Ratio of reduction in payment to original payment ($25/$100)1/4Lump sum received$ 4,000Less 1/4 of unrecovered investment (1/4 of $15,000)3,750Portion of lump sum taxable$ 250