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 began receiving annuity payments from a qualified retirement plan after November 18, 1996, you generally must 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 Instructions for Form 1040 or Instructions for Form 1040A or in Publication 575 (PDF), 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 (PDF), Tax Guide to U.S. Civil Service Retirement Benefits.

If you began receiving annuity payments from a qualified retirement plan 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 (PDF), General Rule for Pensions and Annuities.

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