If you receive pension
payments or annuity payments the amounts you receive
may be fully or partially taxable on your tax return. You must report the taxable amount on
your tax return. Your pension
payments or annuity payments are taxable on your tax return in
their entirety if your employer contributed all of the cost of the pension
or annuity plan, or if you
received all your contributions back tax free in previous tax years.
If you contributed after tax dollars to your pension or annuity, your pension
payments or annuity payments are partially taxable on your tax return. You will not pay tax
on your tax return on the
pension payments or annuity payments that represent a return of
your own after tax dollars. This is your cost in the pension or annuity plan or investment, and includes the amounts your
employer contributed that were taxed to you at the time they were paid into the
pension or annuity plan.
If you retired after July 1, 1986, and you made
after tax contributions to your pension or annuity plan, you can use the General Rule or the Simplified Method to figure how much
of your pension or annuity income is taxable and must be reported on your tax return. If your pension payments or annuity payments started
after November 18, 1996, you generally must use the Simplified Method on
your tax return. You must figure the
tax free part on your tax return when the pension or annuity payments first begin. Any cost of
living increases you receive are
fully taxable on your tax return. Under these tax rules, a part of your yearly pension or annuity
payment is
taxable, and you can exclude a part of each pension or annuity payment from your
taxable income on your tax return.
To determine the tax free
part on your tax return, you must know how much you have paid into the
pension or annuity plan
after tax over the years. Just as your pension or annuity contributions may be spread over years, the
tax free amount recovered is spread over years on your tax return.
To use either rule on your tax return, you must also know the total amount you can expect to receive
from your pension or annuity over
your lifetime. The Simplified Method can only be used with a tax qualified employee plan,
annuity or tax sheltered annuity. To figure the tax free part under the Simplified Method
on your tax return use the Simplified Method Worksheet in the publication or the Form 1040 instructions.
Worksheet
A is for annuity payments received on or before November 18, 1996 and Worksheet B is for
payments starting after that date. An additional worksheet is provided for annuity
payments made after December 31, 1997, and that are payable over the lives of more than
one individual.
If you cannot use the Simplified
Method on your tax return, you must use the General Rule on your tax
return. You can ask the IRS to figure the tax free part under the General Rule. There is a $75.00 fee for this
service.
If you retired before age 55, your pension or annuity payments may be subject to an
additional 10% tax on early distributions. However, this additional tax will not apply if
the pension or annuity payments are made as part of a series of substantially equal payments that are paid
over your life. For other exceptions to the tax, get IRS Publication 575, Pension and
Annuity Income.
The taxable part of your pension or annuity payments is generally subject to federal
income tax withholding. You may choose not to have income tax withheld unless the payments
are eligible rollover distributions. If you do not want tax withheld from your pension or
annuity, or if you want to specify how tax is to be withheld, you should give the payer
Form W-4P, Withholding
Certificate for Pension or Annuity Payments, or a similar form provided by the payer.
Withholding tax from periodic payments of a pension or annuity is generally figured the same
way as for salaries and wages. If you do not give a completed tax withholding certificate to
the payer, the payer must withhold tax as if you were married and claiming three
tax withholding allowances. If you do not give the payer your correct social security number
tax will be withheld as if you were single and claiming no tax withholding allowances.
Special tax rules apply to non-periodic payments from
tax qualified retirement plans received
under a pension or annuity plan.
