Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Income — Retirement Income Workout

Taxable Pensions and Annuities

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.