Topic 411 - Pensions – the General Rule and the Simplified MethodIf 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
Instructions for Form 1040 or
Instructions for Form 1040A 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 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.
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