Partially Taxable Pensions and Annuities Other than IRAs

Methods for Figuring Taxable Portions

There are two methods used to figure the taxable portion of each pension or annuity payment:

• The General Rule
• The Simplified Method

Unless an exception applies, retirees must use the Simplified Method for annuity payments from a qualified plan. A qualified plan is established by an employer to provide retirement benefits for employees and their beneficiaries. Employees typically do not pay taxes on plan assets until the assets are distributed; furthermore, earnings on qualified plans are tax deferred. Taxpayers who have been using the General Rule to figure the taxable portion for past years should be referred to a professional tax preparer.

If the taxpayer's annuity starting date is before July 2, 1986, the General Rule has to be used unless the Three-Year Rule can be used.