An annuitant paid $100,000 in premiums for an immediate annuity with an expected return of $200,000. Under IRC §72(b), what is the exclusion ratio applied to each monthly payment?

Why this is the answer

The §72(b) exclusion ratio spreads the tax-free return of investment evenly over the annuitant's expected return. Numerator is 'investment in the contract' (after-tax premiums less prior tax-free withdrawals). Denominator is 'expected return' (monthly payment × life-expectancy multiple from Reg §1.72-9 tables, or fixed-period total). Once the cumulative excluded amount equals the investment in the contract — under §72(b)(2) for post-1986 starting dates — the ratio drops to zero and all subsequent payments are fully taxable. If the annuitant dies early, unrecovered basis is deductible under §72(b)(3) on the final return, and §67(b)(10) keeps that deduction out of the miscellaneous itemized category.