I have 3 annuity non-qualified contracts which I bought in 2004. I was
61 years old at that time. These are referred to as "safe money" contracts. They pay equal monthly installments for 14 years based upon what I paid, and I can never get less than I put in, although if stock market/value of contracts increases sufficiently in 5 years from the date of purchase I could re-up for another 14 years without adding additional money. [I have to pay a 1/2 point for this insuarnce feature].Last year i learned that I could recover a prorata portion of my investment as a tax free prorata return of my investment, referred to as an exclusion. I was unaware of this before because the 1099r didnt check off that the taxable amount was unknown and checked that the amount paid was the amount taxable. However , I confirmed from three separate accountants and some research that a part of what i paid in was indeed excludable, as I was in the amortization phase of the contract, not the accumulation phase. I use a software program to do my taxes.
this year I thought i would check the irs instructions and they advise in the 1040 instructions to use the simplified mehtod in the worksheet. However Pub 939 suggests to use the general method.
In any case, using the worksheet at page 23 of the 1040 instructions gave me a larger taxable amount of the distribution than using the computer software program . I think this may be because in calculating the excludeable amount of the distribution the 1040 uses the total number of months of life expectancy--, 260--months from the time i was
61 when i bought the contract, although i think i started receiving distibutions in 2006..possibly 2005. [the number to divide into the total cost is still 260 months , whether I was 61 or 63].Because i can never exclude in total more than i paid for each contract whichever method or worksheet i use, should i switch to the worksheet in the 1040 instructions to calculate taxable income or stay with the software program's mehtod??