Getting Your Own Money Back
An annuity payment is part your own capital coming back and part income. A fixed exclusion ratio splits every payment the same way — until you have recovered everything you put in. From the next payment on, the whole thing is taxable.
The source rules 26 U.S.C. §72(b), full text — optional
§72 as a whole runs to about 500 provisions — it covers early-distribution penalties, plan loans, modified endowment contracts and much else that has nothing to do with this calculation. Reproducing all of it here would bury the one rule the tool models, so the panel carries subsection (b) whole, the provision that creates the exclusion ratio. Nothing in it is summarised or trimmed. Read all of §72 · regulations at §1.72-1, §1.72-2 and §1.72-4.
26 U.S.C. §72(b) — Exclusion ratio
(b) Exclusion ratio
(1) In general Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date).
(2) Exclusion limited to investment The portion of any amount received as an annuity which is excluded from gross income under paragraph (1) shall not exceed the unrecovered investment in the contract immediately before the receipt of such amount.
(3) Deduction where annuity payments cease before entire investment recovered
(A) In general If—
(i) after the annuity starting date, payments as an annuity under the contract cease by reason of the death of an annuitant, and
(ii) as of the date of such cessation, there is unrecovered investment in the contract,
(B) Payments to other persons In the case of any contract which provides for payments meeting the requirements of subparagraphs (B) and (C) of subsection (c)(2), the deduction under subparagraph (A) shall be allowed to the person entitled to such payments for the taxable year in which such payments are received.
(C) Net operating loss deductions provided For purposes of section 172, a deduction allowed under this paragraph shall be treated as if it were attributable to a trade or business of the taxpayer.
(4) Unrecovered investment For purposes of this subsection, the unrecovered investment in the contract as of any date is—
(A) the investment in the contract (determined without regard to subsection (c)(2)) as of the annuity starting date, reduced by
(B) the aggregate amount received under the contract on or after such annuity starting date and before the date as of which the determination is being made, to the extent such amount was excludable from gross income under this subtitle.
Verify before relying on this. Retrieved 24 September 2026. Tax law changes; confirm against the primary source above before using it in class or in practice. Nothing here is tax advice.
Every payment, split
This payment, split
Educational simulation, not tax advice. A date-neutral model: the expected-return multiple is an editable assumption rather than a table lookup for a named person or year. Assumes a fixed monthly payment for life with no refund or period-certain feature, and ignores the deduction allowed under §72(b)(3) for investment left unrecovered at death. Source model: ACCTG 410 Individual Taxation Toolbox, “Annuity” tab.