Mary, age 70, recently purchased a nonqualified immediate annuity to supplement her retirement income, and through it will receive a lifetime income of $800 per month. Which of the following statements most correctly describes how this income will be taxed?

A) Mary will pay income tax each year on just a portion of the payments received, and when she has fully recovered her basis, all future payments will be taxable.
B) Mary will pay income tax on the full amount received each year until the sum of payments equals the amount she paid for the annuity (her basis), at which point all future payments will not be taxed.
C) Mary will not pay income tax until the sum of payments received equals her basis, at which point all future payments will be fully taxable.
D) Mary will pay income tax each year on just a portion of the payments received, and when she has fully recovered her basis, all future payments will not be taxed.

Ans: A) Mary will pay income tax each year on just a portion of the payments received, and when she has fully recovered her basis, all future payments will be taxable.