Tax Topic #411 |
2008 Tax Year |
Topic 411 - Pensions – the General Rule and the Simplified Method
If you made after-tax contributions to your pension or annuity plan, you
can exclude part of your pension or annuity payments from your income. You
must figure this tax-free part when the payments first begin. The tax-free
amount remains the same each year, even if the amount of the payment changes.
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
in the Form 1040 Instructions or Form 1040A Instructions or in Publication 575, Pension and Annuity Income.
For more information on the Simplified Method, refer to Publication 575,
or if you receive United States Civil Service retirement benefits, refer to Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.
If you began receiving annuity payments from a qualified retirement plan
after July 1, 1986 and before November 19, 1996, you generally could have
chosen to use either the Simplified Method or the General Rule to figure the
tax–free part of the payments. If you receive annuity payments from
a nonqualified retirement plan, you must use the General Rule. Under the General
Rule, you figure the taxable and tax–free parts of your annuity payments
using life expectancy tables prescribed by the IRS. For a fee, the IRS will
figure the tax–free part of your annuity payments for you. For more
information, refer to Publication 939, General Rule for Pensions and
Annuities.
Page Last Reviewed or Updated: December 22, 2008
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