If you retired after July 1, 1986, you can use the General Rule or the Simplified
General Rule to figure how much of your pension income is taxable. You must figure the
tax-free part when the payments first begin. Any cost-of-living increases you receive are
fully taxable. Under these rules, a part of your yearly pension or annuity payments is
taxable, and you can exclude a part of each payment from your income.
To determine the tax-free part, you must know how much you have paid into the plan over
the years. Just as your contributions may be spread over years, the tax-free amount
recovered is spread over years.
To use the General Rule, you must also know the total amount you can expect to receive
over your lifetime. To figure this amount, you generally must use actuarial tables.
You may be able to use the Simplified General Rule if you meet the following
requirements:
1.Your annuity starting date is after July 1, 1986;
2.The annuity payments are for either your life or your life and that of your
beneficiary;
3.the payments are from a qualified employee plan, a qualified employee annuity, or a
tax-sheltered annuity; and
4.when the payments began, you were either under age 75 or entitled to fewer than five
years of guaranteed payments.
For additional information on the Simplified General Rule, see Publication 575, Pension
and Annuity Income (Including Simplified General Rule). For information on the General
Rule, see Publication 939, Pension General Rule (Nonsimplified Method). If you are
receiving U.S. Civil Service Retirement Benefits, see Publication 721, Tax Guide to U.S.
Civil Service Retirement Benefits.
If you cannot use the Simplified General Rule, you can ask the IRS to figure the
tax-free part under the General Rule. There is a $75.00 fee for this service. Publication
939 contains a detailed explanation of the information required to be furnished with your
request.
For information on tax changes effective for 1996, refer to Publication 17, Your
Federal Income Tax.
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