If you receive an annuity or other qualified pension from your former employer, a portion of the pension is tax free. The Internal Revenue Service bases the pension tax rate on your age and the value of the pension. You can calculate the taxable portion of this type of annuity using the simplified method. The IRS provides a worksheet you can use to calculate the taxable portion of your annuities.
1. Obtain the simplified method worksheet from the Internal Revenue Service. You can download this form from the IRS' website, or call to request a copy by mail.
2. Look up your total annuity payments. You'll find this number in Box 1 of your Form 1099R. Write it on Line 1 of the simplified method worksheet, and on Line 16A of Form 1040.
3. Put the amount you initially invested in the annuity on Line 2.
4. Find your age in the annuity table at the bottom of the worksheet. This tells you how much your annuity is expected to be worth at the end of your life. Write this number on Line 3.
5. Divide Line 2 by Line 3. Put the result on Line 4. In future years, use the Line 4 result from this year instead of redoing the calculation.
6. Multiply the Line 4 result by the number of months you received payments this year, and put the result on Line 5. List any tax-free amount that you received on Line 6 and subtract it from Line 2 to determine the total initial cost of your annuity. If the result is smaller than the Line 5 result, put it on Line 8. Otherwise, put your Line 5 result on Line 8.
7. Subtract Line 8 from Line 1 to determine the entire taxable pension amount. Put this amount on Line 16b of your 1040 form. If the amount is less than zero, put in zero.
8. Add lines 6 and 8 if the annuity began before 1987, and put the result on Line 10. Otherwise, leave Line 10 blank.
- If the annuity is not a qualified plan, you can't calculate the taxable portion using your age and the simplified rule. You'll have to calculate the taxable portion for this type of annuity based on your expected return.
Items you will need
- Simplified Method Worksheet
- Form 1040
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