Taxable Pensions General Rule and Simplified Method

Pension Plans are Taxed in a Unique Way

If certain contributions to your pension plan or annuity were previously included in your gross income, the distributions under this arrangement are excluded from income. You must figure the tax-free portion initially when payments begin. The tax free portion generally remains the same each year, even though the amount of the payments change. However, the total amount of your pension or annuity can exclude from income is generally limited to the total cost. For more information about determining your total cost, see Publication 575, Pension and Annuity Income (Income from pensions and annuities).

 

Simplified Plans for Pensions

If you begin receiving annuity payments of a qualified retirement plan after November 18, 1996, you generally must use the Simplified Method to calculate the tax-free portion of the payments. A qualified retirement plan is a qualified employee plan, a qualified employee plan or an annuity contract or tax-sheltered annuity.

 

Completing the worksheet for the simplified method

Under the Simplified Method, you figure the taxable part and tax-free parts of your annuity payments by completing the worksheet for the simplified method, which is found in the instructions for Form 1040 or Form 1040A instructions, or Publication 575. For more information on the Simplified Method, see Publication 575, or if you receive retirement benefits from the United States Civil Service, see Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits (Tax Guide for retirement benefits of civil service USA).

 

General Rule for Calculating Taxable Portion of Pension

If you began receiving annuity payments from a retirement plan after qualifying from July 1, 1986 and before November 19, 1996, in general, may have chosen to use the Simplified Method or the General Rule to calculate the free part of tax payments. If you receive annuity payments from a pension plan does not meet the requirements, you must use the General Rule. According to the General Rule, you figure the taxable part and tax-free parts of your annuity payments using life expectancy tables provided by the IRS.

 

IRS Pension Help

If you pay a fee, the IRS will figure the tax-free portion of your annuity. For more information, see Publication 939, General Rules for Pensions and Annuities (General Rule for Pensions and Annuities).