This publication gives you the information you need to determine the tax treatment of your pension and annuity income under the General Rule. Generally, each of your monthly annuity payments is made up of two parts: the tax-free part that is a return of your net cost, and the taxable balance.

The General Rule is one of the two methods used to figure the tax-free part of each annuity payment based on the ratio of your investment in the contract to the total expected return. The other method is the Simplified Method, which is discussed in Publication 575, Pension and Annuity Income.

Use this publication if you receive pension or annuity payments from:

1. A nonqualified plan (for example, a private annuity, a purchased commercial annuity, or a nonqualified employee plan),
2. A qualified plan if:
   1. Your annuity starting date is before November 19, 1996 (and after July 1, 1986), and you do not qualify to use, or choose not to use, the Simplified Method, or
   2. You are 75 or over and the annuity payments are guaranteed for at least 5 years (regardless of your annuity starting date).

The following are qualified plans.

• A qualified employee plan.
• A qualified employee annuity.
• A tax-sheltered annuity (TSA) plan or contract.

If your annuity starting date is after November 18, 1996, you must use the Simplified Method for annuity payments from a qualified plan. This method is covered in Publication 575.

If, at the time the annuity payments began, you were at least 75 and were entitled to annuity payments from a qualified plan with fewer than 5 years of guaranteed payments, you must use the Simplified Method.

Certain topics related to pensions and annuities are not covered in this publication. They include:

• Simplified Method. This method is covered in Publication 575. That publication also covers nonperiodic payments (amounts not received as an annuity) from a qualified pension or annuity plan, rollovers, special averaging and capital gain treatment of lump-sum distributions, and special additional taxes on early distributions, excess distributions, and excess accumulations (not making required minimum distributions).
• Individual retirement arrangements (IRAs). Information on the tax treatment of amounts you receive from an IRA is included in Publication 590, Individual Retirement Arrangements (IRAs).
• Life insurance payments. If you receive life insurance payments because of the death of the insured person, get Publication 525, Taxable and Nontaxable Income, for information on the tax treatment of the proceeds.

If, after reading this publication, you need help to figure the taxable part of your pension or annuity, the IRS can do it for you for a fee. For information on this service, see Requesting a Ruling on Taxation of Annuity, later.

We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

 
Internal Revenue Service  
Individual Forms and Publications Branch  
W:CAR:MP:T:I  
1111 Constitution Ave. NW  
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

See How To Get Tax Help, near the end of this publication for information about getting these publications and forms.

Some of the terms used in this publication are defined in the following paragraphs.

• A pension is generally a series of payments made to you after you retire from work. Pension payments are made regularly and are for past services with an employer.
• An annuity is a series of payments under a contract. You can buy the contract alone or you can buy it with the help of your employer. Annuity payments are made regularly for more than one full year.

Particular types of pensions and annuities include:

1. Fixed period annuities. You receive definite amounts at regular intervals for a definite length of time.
2. Annuities for a single life. You receive definite amounts at regular intervals for life. The payments end at death.
3. Joint and survivor annuities. The first annuitant receives a definite amount at regular intervals for life. After he or she dies, a second annuitant receives a definite amount at regular intervals for life. The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant.
4. Variable annuities. You receive payments that may vary in amount for a definite length of time or for life. The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes.
5. Disability pensions. You are under minimum retirement age and receive payments because you retired on disability. If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524.

If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans.

• A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. This plan must meet Internal Revenue Code requirements. It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions.
• A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements.
• A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization.

The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. It does not qualify for most of the tax benefits of a qualified plan.

The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity.

If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. This is treated as a request for a ruling. See Requesting a Ruling on Taxation of Annuity near the end of this publication.

Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments.