Publication 575 - Pension And Annuity Income - 2004 Page 10
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36weekly, monthly, or yearly) for a period of time greater than
You determine which method to use when you first begin
one year (such as for 15 years or for life). These payments
receiving your annuity, and you continue using it each year
that you recover part of your cost.
are also known as amounts received as an annuity. If you
receive an amount from your plan that is not a periodic
Qualified plan annuity starting before November 19,
payment, see Taxation of Nonperiodic Payments, later.
1996. If your annuity is paid under a qualified plan and
In general, you can recover the cost of your pension or
your annuity starting date (defined earlier under Cost (In-
annuity tax free over the period you are to receive the
vestment in the Contract)) is after July 1, 1986, and before
payments. The amount of each payment that is more than
November 19, 1996, you could have chosen to use either
the part that represents your cost is taxable.
the Simplified Method or the General Rule. If your annuity
starting date is before July 2, 1986, you use the General
Fully Taxable Payments
Rule unless your annuity qualified for the Three-Year Rule.
If you used the Three-Year Rule (which was repealed for
The pension or annuity payments that you receive are fully
annuities starting after July 1, 1986), your annuity pay-
taxable if you have no cost in the contract because:
ments are now fully taxable.
•
You did not pay anything or are not considered to
Exclusion limit. Your annuity starting date determines
have paid anything for your pension or annuity,
the total amount of annuity payments that you can exclude
•
from income over the years.
Your employer did not withhold contributions from
your salary, or
Exclusion limited to cost. If your annuity starting date
•
is after 1986, the total amount of annuity income that you
You got back all of your contributions tax free in prior
can exclude over the years as a recovery of the cost
years (however, see Exclusion not limited to cost
cannot exceed your total cost. Any unrecovered cost at
under Partly Taxable Payments, later).
your (or the last annuitant’s) death is allowed as a miscella-
neous itemized deduction on the final return of the dece-
Report the total amount you got on Form 1040, line 16b,
dent. This deduction is not subject to the 2%-of
or Form 1040A, line 12b. You should make no entry on
adjusted-gross-income limit.
Form 1040, line 16a, or Form 1040A, line 12a.
Example 1. Your annuity starting date is after 1986, and
Deductible voluntary employee contributions. Distri-
you exclude $100 a month under the Simplified Method.
butions you receive that are based on your accumulated
The total cost of your annuity is $12,000. Your exclusion
deductible voluntary employee contributions are generally
ends when you have recovered your cost tax free, that is,
fully taxable in the year distributed to you. Accumulated
after 10 years (120 months). After that, your annuity pay-
deductible voluntary employee contributions include net
ments are fully taxable.
earnings on the contributions. If distributed as part of a
lump sum, they do not qualify for the 10-year tax option or
Example 2. The facts are the same as in Example 1,
capital gain treatment.
except you die (with no surviving annuitant) after the eighth
year of retirement. You have recovered tax free only
Partly Taxable Payments
$9,600 (8 × $1,200) of your cost. An itemized deduction for
your unrecovered cost of $2,400 ($12,000 minus $9,600)
If you have a cost to recover from your pension or annuity
can be taken on your final return.
plan (see Cost (Investment in the Contract), earlier), you
can exclude part of each annuity payment from income as
Exclusion not limited to cost. If your annuity starting
date is before 1987, you can continue to take your monthly
a recovery of your cost. This tax-free part of the payment is
exclusion for as long as you receive your annuity. If you
figured when your annuity starts and remains the same
chose a joint and survivor annuity, your survivor can con-
each year, even if the amount of the payment changes.
tinue to take the survivor’s exclusion figured as of the
The rest of each payment is taxable.
annuity starting date. The total exclusion may be more
You figure the tax-free part of the payment using one of
than your cost.
the following methods.
•
Simplified Method. You generally must use this
Simplified Method
method if your annuity is paid under a qualified plan
(a qualified employee plan, a qualified employee an-
Under the Simplified Method, you figure the tax-free part of
nuity, or a tax-sheltered annuity plan or contract).
each annuity payment by dividing your cost by the total
You cannot use this method if your annuity is paid
number of anticipated monthly payments. For an annuity
under a nonqualified plan.
that is payable for the lives of the annuitants, this number is
•
General Rule. You must use this method if your
based on the annuitants’ ages on the annuity starting date
annuity is paid under a nonqualified plan. You gener-
and is determined from a table. For any other annuity, this
ally cannot use this method if your annuity is paid
number is the number of monthly annuity payments under
under a qualified plan.
the contract.
Page 10
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