Exclusion ratio
Certified Financial Planner glossary · Certified Financial Planner
Definition
The proportion of each annuity payment representing tax-free return of basis.
Exclusion ratio in plain English
Each SPIA check lands and the client treats the whole amount like a taxable paycheck. Exclusion ratio carves every payment into two pieces: the tax-free return of basis and the taxable earnings slice. The ratio is the portion of each annuity payment that represents recovery of basis, so only the rest is taxed as ordinary income until basis is recovered under the contract's rules. Mix this up with capital gains treatment and you will miss the stem. Annuity exclusion is about basis recovery timing inside the payment stream, not preferential rates.
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