How to Calculate a Pension's Taxable Amount
Original post by Ron White of Demand Media
A pension provides a nice nest egg for individuals in retirement. Taxpayers, though, must report all or a portion of their annuity payments, the monthly payments given to pension-holders. The Internal Revenue Service (IRS) administers tax laws that relate to pension payments. These laws include an established method of calculating the portion of pension payments that must be reported as income. This income is taxable. You can calculate your taxable amount from pension payments by using the IRS Simplified Method. To make the process less difficult, the IRS publishes a Simplified Method Worksheet with the IRS 1040 instruction booklet. By using the booklet and applying some basic math, you can calculate your taxable amount in a few basic steps.
Obtain IRS Form 1099-R. Your pension plan administrator should mail you a copy of this form at the end of the tax year. If you do not receive one, contact your plan administrator and request a copy. This information will help you calculate your taxable amount.
Obtain the IRS Form 1040 instruction booklet and proceed to the section on pensions. Find the Simplified Method Worksheet. For tax year 2010, this worksheet appeared on page 24 of the Form 1040 instruction booklet.
Enter the total pension or annuity payments for the tax year on the Simplified Method Worksheet using the figure in Box 1 of Form 1099-R.
Enter your cost in the plan at the annuity starting date on the Simplified Method Worksheet. You will find this information on Form 1099-R.
Use the appropriate table to determine the figure for Line 3 of the worksheet. You only use Table 2 if the annuity payments are for both your life and the lifetime of your beneficiary and only if you began receiving payments after 1997.
Divide the figure on Line 2 of your worksheet by the figure on Line 3 and write this number on Line 4.
Multiply the figure from Line 4 by the number of months in the tax year during which payments were made to you.
Enter any amount recovered tax free on Line 6. Subtract Line 6 from Line 2 and enter the result on Line 7. Next, enter the smaller of Line 5 and Line 7 on Line 8.
Subtract the figure on Line 8 from the figure on Line 1. The result is your taxable amount for the tax year. You should enter this amount as taxable income on Line 16b of your Form 1040 section in income.
Tips & Warnings
- A portion of your payments will be free from tax if you made any after-tax pension contributions. You were already taxed on these contributions when you earned the income.
- You can contact your plan administrator if you need assistance with information on your 1099-R.
- IRS.gov: Publication 575
- Public Employees Retirement Association of Minnesota: Your Pension and Taxes
- IRS.gov: General Rule
About the Author
Based in Central Florida, Ron White is a freelance journalist and stay-at-home dad. A former editor at a Central Florida daily newspaper, White now writes frequently for the "Daytona Beach News-Journal" and "Orlando Sentinel." He holds a Bachelor of Arts degree in journalism from Eastern Illinois University.