If you retired after July 1, 1986, and you made after-tax contributions to your retirement plan, you can use the General Rule or the Simplified Method 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 Method. 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 after taxes 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. The Simplified Method can only be used with a qualified employee plan, annuity or tax sheltered annuity. To figure the tax-free part under the Simplified Method use the Simplified Method Worksheet in the publication or the Form 1040 instructions. Worksheet A is for annuity payments received on or before November 18, 1996 and Worksheet B is for payments starting after that date. An additional worksheet is provided for annuity payments made after December 31, 1997, and that are payable over the lives of more than one individual.

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 Method, you must use the 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, General Rule for Pensions and Annuities, contains a detailed explanation of the information required to be furnished with your request.

Publications can be downloaded from this site, or ordered by calling 1-800-829-3676.

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