Taxes Tax Planning Are Annuities and Pensions Taxable? How to report the taxable portion of your pension and annuity payments By William Perez Updated on January 23, 2023 Reviewed by Ebony J. Howard Reviewed by Ebony J. Howard Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. learn about our financial review board In This Article View All In This Article Taxable Portion of Your Pensions and Annuities General Rule vs. Simplified Method How to Report Pension and Annuity Income Frequently Asked Questions (FAQs) Photo: martinedoucet / Getty Images If you have retirement income from a pension or an annuity, some or all of the money you receive may be taxable, according to the IRS. Whether that income is fully or partially taxed depends on if you contributed to the plan with before-tax or after-tax dollars. Key Takeaways Taxation of pension or annuity income depends on whether you contributed to the plan with before-tax or after-tax dollars. Claiming a tax deduction for contributions makes them taxable upon withdrawal.Not claiming a tax deduction at the time you made the contribution makes the income tax-free upon distribution. You must calculate how taxes will be paid by using one of two methods, depending on the starting date of your plan: the general rule or the simplified method. Taxable Portion of Your Pensions and Annuities The IRS says that your payments are partially taxable if you made your contributions to your pension or annuity with after-tax dollars. You won't pay tax on the portion of the payments that represent a return of the after-tax amount you paid in. These contributions represent your cost in the plan or investment. They include amounts that your employer might have contributed that were taxable to you as income at the time they were made. Note You should calculate the tax-free part of the payments when they first begin. The tax-free part should typically remain the same each year, even if the payment amount changes. Any contributions that you made with after-tax income, those for which you never took a tax deduction, aren't taxable to you at the time of distribution. These include contributions your employer made on your behalf but which were attributed to you as income, so you claimed them on your tax returns and paid taxes on the amounts when they were contributed. The General Rule vs. the Simplified Method You must determine the method by which the remaining amounts will be taxed. Partly taxable pension plans and annuities are taxed under either the General Rule or the Simplified Method. Note You must use the General Rule if your annuity or pension payments began on or before November 18, 1996. You can use the Simplified Method to pin down the taxable portion if your pension or annuity payments began after that date. You're restricted to using the General Rule if the starting date of your annuity was between July 1, 1986, and November 18, 1996, and if you don't qualify to use the Simplified Method. You must also use the General Rule if your starting date is after November 18, 1996, you were age 75 or older as of that date, and your payments were guaranteed for at least five years. You're limited to using the General Rule if you've received payments from a nonqualified plan. A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan. The General Rule The General Rule requires that you use the life expectancy or actuarial tables provided by the IRS to figure the taxable and tax-free portions of your payments. They're included in IRS Publication 939, General Rule for Pensions and Annuities. The publication also walks you through the calculations for your taxable pension and annuity under the General Rule. Note The IRS will calculate your taxable pension income under the General Rule for you for a nominal fee if you don't want to risk making a mistake. The easiest, safest option might be to consult a tax professional or have the IRS make these calculations for you. The Simplified Method The IRS says you can use the Simplified Method to determine how much of your annuity or pension payments is taxable and how much is tax-free if the starting date of payments was after November 18, 1996. The IRS provides a Simplified Method Worksheet to help you along. How to Report Pension and Annuity Income Separate any 1099-R statements you receive into two piles: those from your IRA and those from your pension or annuity plans. You'll report your IRA distributions on lines 4a and 4b of the Form 1040. Report your pension and annuity distributions on lines 5a and 5b. The 5a column is for your total distributions. The 5b column segregates the taxable amount. Frequently Asked Questions (FAQs) What is a pension? A pension is an employer-sponsored retirement plan. The employer contributes to a pool of money that's paid out to eligible retired employees. Employees can contribute as well to some plans. The pension payout is determined by your pay at the time you retired and your years of service. What is an annuity? An annuity is a type of insurance. You pay a premium to an insurance company, and you receive a guaranteed income for the rest of your life. An annuity can be immediate, which means your premium is converted into income right away, or deferred, which means it can be converted into income later. The funds in deferred annuities can earn a fixed interest rate or follow an index, or they can be invested. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Topic No. 410 Pensions and Annuities." IRS. "Topic No. 411 Pensions – The General Rule and the Simplified Method." IRS. "Publication 939, General Rule for Pensions and Annuities- Who must use the General Rule." IRS. "Publication 575, Pension and Annuity Income—Simplified Method." IRS. "Instructions for Form 1040—Lines 5a and 5b Pensions and Annuities." U.S. Department of Labor. "Retirement Plans Benefits and Savings." Investor.gov. "Annuities."