How much of each payment will be excluded from taxation in Irma's deferred fixed annuity?

In a deferred fixed annuity, the taxable and non-taxable portions of payments depend on the investment in the contract compared to the total amount received. When annuitizing a deferred fixed annuity, the non-taxable portion is typically determined using the exclusion ratio, which is based on the total contributions made to the annuity (the investment in the contract) relative to the total expected return.

Assuming Irma’s annuity payments consist of principal and earnings, the portion of each payment that is considered a return of principal is not subject to taxation. This portion is calculated by dividing the total investment by the total expected payments over the life expectancy. If we assume that the total investment in the annuity aligns with the calculated non-taxable portion, arriving at $62.50 as the excluded portion makes sense.

In this scenario, the correct answer reflects the calculated non-taxable return on the principal. Understanding the mechanics behind this calculation allows for accurate assessment of tax liabilities for income received from deferred annuities, situating this answer as a logical conclusion.