1997 Tax Help Archives  

Pensions and Annuities

This is archived information that pertains only to the 1997 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

If you receive retirement benefits in the form of pension or annuity payments, the amounts you receive may be fully taxable, or partly taxable.

Social security and equivalent railroad retirement benefits are not discussed here. For more information about these benefits, refer to Topic 424.

Your pension or annuity payments are fully taxable if your employer contributed all of the cost without including it in your taxable wages, or if you got back all your contributions tax free in previous years.

If you contributed to your pension or annuity, your pension payments are partly taxable. You will not pay tax on the part of the payment that represents a return of the amount you paid. This amount is your cost in the plan or investment, and includes the amounts your employer contributed that were taxable when paid. Partly taxable pensions are taxed under either the general rule or the simplified general rule. If the starting date of your pension annuity payments is after November 18, 1996, you generally must use the simplified general rule to determine how much of your annuity payments are taxable and how much are tax free. To figure how much of your pension or annuity income is taxable, refer to Topic 411.

If you retired before age 55, your pension or annuity payments may be subject to an additional 10% tax on early distributions. However, this additional tax will not apply if the payments are based on life expectancy. For other exceptions to the tax, get Publication 575, Pension and Annuity Income.

The taxable part of your pension or annuity payments is generally subject to federal income tax withholding. You may choose not to have tax withheld unless the payments are eligible rollover distributions. If you do not want tax withheld from your pension or annuity, or if you want to specify how tax is to be withheld, you should give the payer Form W-4P, Withholding Certificate for Pension or Annuity Payments, or a similar form provided by the payer. Withholding from periodic payments of a pension or annuity is figured the same way as for salaries and wages. However, the withholding rules for pensions and annuities are different. If you do not give a completed withholding certificate to the payer, the payer must withhold tax as if you were married and claiming three withholding allowances. If you do not give the payer your correct social security number, tax will be withheld as if you were single and claiming no withholding allowances.

Special rules apply to nonperiodic payments from qualified retirement plans received under a pension or annuity plan. For information on the special tax treatment of lump-sum distributions, refer to Topic 412. If an eligible rollover distribution is paid to you, the payer must withhold 20% of it , unless you choose the direct rollover option. For information on the treatment of eligible rollover distributions, refer to Topic 413.

If too little tax is withheld, you may be required to make estimated tax payments. Refer to Topic 355 for information on estimated tax. You may also order Publication 505, Tax Withholding and Estimated Tax, by calling 1-800-829-3676.

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