Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. You must report them on your income tax return. taxmap/pub17/p17-053.htm#en_us_publink1000171815
If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. The rest of the amount you receive is generally taxable. You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Your annuity starting date and whether or not your plan is qualified determine which method you must or may use.
If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan.
If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately.
If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method.taxmap/pub17/p17-053.htm#en_us_publink1000171816
Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Once your annuity starting date is determined, it does not change. If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet.taxmap/pub17/p17-053.htm#en_us_publink1000171817
If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. This deduction is not subject to the 2%-of-adjusted-gross-income limit. taxmap/pub17/p17-053.htm#en_us_publink1000171818
If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your cost. taxmap/pub17/p17-053.htm#en_us_publink1000171819
Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. For any other annuity, this number is the number of monthly annuity payments under the contract. taxmap/pub17/p17-053.htm#en_us_publink1000171820
You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both:
- Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and
- On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments.
Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. taxmap/pub17/p17-053.htm#en_us_publink1000171822
Worksheet 10-A. Simplified Method Worksheet for Bill Smith
| 1. ||Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a|| 1. || 14,400 |
| 2. ||Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. See Cost (Investment in the Contract) earlier|| 2. || 31,000 || || |
| || Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Otherwise, go to line 3. || || || || |
| 3. ||Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below|| 3. || 310 || || |
| 4. ||Divide line 2 by the number on line 3|| 4. || 100 || || |
| 5. ||Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6|| 5. || 1,200 || || |
| 6. ||Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year|| 6. || -0- || || |
| 7. ||Subtract line 6 from line 2|| 7. || 31,000 || || |
| 8. ||Enter the smaller of line 5 or line 7|| 8. || 1,200 |
| 9. || Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b|| 9. || 13,200 |
| || Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. || || |
| 10. ||Was your annuity starting date before 1987?|
□ Yes. STOP. Do not complete the rest of this worksheet.
☑ No. Add lines 6 and 8. This is the amount you have recovered tax free through 2009. You will need this number if you need to fill out this worksheet next year
| 10. || 1,200 |
| 11. || Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable|| 11. || 29,800 |
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
| TABLE 1 FOR LINE 3 ABOVE |
| || AND your annuity starting date was— |
| IF the age at annuity|
starting date was...
| before November 19,|
1996, enter on line 3...
| after November 18,|
1996, enter on line 3...
|55 or under||300||360|
|71 or older||120||160|
| TABLE 2 FOR LINE 3 ABOVE |
| IF the combined ages|
at annuity starting
| || THEN enter|
on line 3...
|110 or under|| ||410|
|141 or older|| ||210|
Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2009.taxmap/pub17/p17-053.htm#en_us_publink1000171826
If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Enter on line 3 the number shown for your age at the annuity starting date.taxmap/pub17/p17-053.htm#en_us_publink1000171827
If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date.
However, if your annuity starting date is before January 1, 1998, do not use Table 2 and do not combine the annuitants' ages. Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date.
Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year.
Bill Smith, age 65, began receiving retirement benefits in 2009, under a joint and survivor annuity. Bill's annuity starting date is January 1, 2009. The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death.
Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. His completed worksheet is shown in Worksheet 10-A.
Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. The full amount of any annuity payments received after 310 payments are paid must be included in gross income.
If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. This deduction is not subject to the 2%-of-adjusted- gross-income limit.taxmap/pub17/p17-053.htm#en_us_publink1000234406
If you received these distributions, see Publication 575 for how to complete Worksheet 10-A.taxmap/pub17/p17-053.htm#en_us_publink1000171830
You must use the General Rule if you receive pension or annuity payments from:
- A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or
- A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years.
If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. You also had to use it for any fixed-period annuity. If you did not have to use the General Rule, you could have chosen to use it. If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule.
If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost.taxmap/pub17/p17-053.htm#en_us_publink1000171832
You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. See Who must use the Simplified Method
For complete information on using the General Rule, including the actuarial tables you need, see Publication 939.