What You Need to Know About Your Pensions and Annuities Income
"If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, the amounts you receive may be fully taxable, or partially taxable." (IRS Tax Topic 410, Pensions and Annuities.)
Pension and Annuity Income (Form 1040 Line 16)
Gather all your 1099-R statements from each bank, mutual fund, or retirement plan for the year. Form 1099-R statements report distributions from various retirement plans.
Separate 1099-R statements into two piles: those received from your IRA, and those received from your pension or annuity plans.
Report your IRA distributions on line 15. Report your pension and annuity distributions on line 16.
Taxable Portion of Pensions and Annuities
"If you contributed after–tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after–tax amount you paid. This amount is your cost in the plan or investment, and includes the amounts your employer contributed that were taxable to you when contributed. Partly taxable pensions are taxed under either the General Rule or the Simplified Method." (from IRS Tax Topic 410)
"Under the General Rule, you figure the taxable and tax–free parts of your annuity payments using life expectancy tables prescribed by the IRS." (from IRS Tax Topic 411)
You must use the General Rule if your annuity or pension payments began on or before November 18, 1996. If your pension or annuity payments began after this date, then you can use the
Simplified Method to calculate your taxable portion.
To figure your taxable pension and annuity under the General Rule, you need to read IRS Publication 939, General Rule for Pensions and Annuities.
The IRS will calculate your taxable pension income under the General Rule for you for a nominal user fee. Instructions for asking the IRS to calculate your taxable pension under the General Rule is found in Pub 939, Requesting a Ruling on Taxation of Annuity.
"If you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax–free part of the payments. A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax–sheltered annuity plan. Under the Simplified Method, you figure the taxable and tax–free parts of your annuity payments by completing the Simplified Method Worksheet." (from IRS Tax Topic 411)
To figure your taxable pension and annuity payments, you must use the Simplified Method Worksheet on page 26 of the Instructions for Form 1040 (PDF). The nontaxable portion is reported on Form 1040 Line 16a, and taxable portion is reported on Form 1040 Line 16b.
The best source for comprehensive and easy-to-read tax information about annuities and pensions is found in Chapter 7 of JK Lasser's Your Income Tax. This chapter includes all the information you need, including IRS worksheets, life expectancy tables, and discussions of various types of annuities and pension plans.
You can also reference the following IRS Publications: