If you retired after July 1, 1986, you can use the General Rule or the Simplified
General Rule to figure how much of your pension income is taxable. If your annuity
payments from your pension started after November 18, 1996, you generally must use the
Simplified General Rule. You must figure the tax-free part when the payments first begin.
Any cost-of-living increases you receive are fully taxable. Under these rules, a part of
your yearly pension or annuity payments is taxable, and you can exclude a part of each
payment from your income.
To determine the tax-free part, you must know how much you have paid into the plan over
the years. Just as your contributions may be spread over years, the tax-free amount
recovered is spread over years.
To use either rule, you must also know the total amount you can expect to receive over
your lifetime. To figure this amount under the Simplified General Rule use either
Worksheet A or B in the publications or the Form
1040 instructions. Worksheet A is for annuity payments on or before November 18, 1996
and Worksheet B is for payments starting after that date.
For additional information on the Simplified General Rule, order Publication
575, Pension and Annuity Income. For information on the General Rule, order
Publication 939, Pension General Rule (Nonsimplified Method). If you are receiving
U.S. Civil Service Retirement Benefits, order Publication
721, Tax Guide to U.S. Civil Service Retirement Benefits.
If you cannot use the Simplified General Rule, you can ask the IRS to figure the
tax-free part under the General Rule. There is a $75.00 fee for this service. Publication
939 contains a detailed explanation of the information required to be furnished with your
Publications can be ordered by calling 1-800-829-3676, or downloaded from this web site.
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