Some of the terms used in this publication are defined in the
following paragraphs.
- A pension is generally a series of payments made
to you after you retire from work. Pension payments are made regularly
and are for past services with an employer.
- An annuity is a series of payments under a
contract. You can buy the contract alone or you can buy it with the
help of your employer. Annuity payments are made regularly for more
than one full year.
Types of pensions and annuities.
Particular types of pensions and annuities include:
- Fixed period annuities.
You receive definite amounts at regular
intervals for a definite length of time.
- Annuities for a single life. You receive definite
amounts at regular intervals for life. The payments end at
death.
- Joint and survivor annuities.
The first annuitant receives a
definite amount at regular intervals for life. After he or she dies, a
second annuitant receives a definite amount at regular intervals for
life. The amount paid to the second annuitant may or may not differ
from the amount paid to the first annuitant.
- Variable annuities.
You receive payments that may vary in
amount for a definite length of time or for life. The amounts you
receive may depend upon such variables as profits earned by the
pension or annuity funds or cost-of-living indexes.
- Disability pensions. You are under minimum
retirement age and receive payments because you retired on disability.
If, at the time of your retirement, you were permanently and totally
disabled, you may be eligible for the credit for the elderly or the
disabled discussed in Publication 524.
If your annuity starting date is after November 18, 1996, the
General Rule cannot be used for the following qualified plans.
- A qualified employee plan is an employer's stock
bonus, pension, or profit-sharing plan that is for the exclusive
benefit of employees or their beneficiaries. This plan must meet
Internal Revenue Code requirements. It qualifies for special tax
benefits, including tax deferral for employer contributions and
rollover distributions, and capital gain treatment or the 5- or
10-year tax option for lump-sum distributions.
- A qualified employee annuity is a retirement
annuity purchased by an employer for an employee under a plan that
meets Internal Revenue Code requirements.
- A tax-sheltered annuity is a special annuity plan
or contract purchased for an employee of a public school or tax-exempt
organization.
The General Rule is used to figure the tax treatment of
various types of pensions and annuities, including nonqualified
employee plans, defined below:
A nonqualified employee plan
is an employer's plan that does
not meet Internal Revenue Code requirements. It does not qualify for
most of the tax benefits of a qualified plan.
Annuity worksheets.
The worksheets found after the text of this publication may be
useful to you in figuring the taxable part of your annuity.
Request for a ruling.
If you are unable to determine the income tax treatment of your
pension or annuity, you may ask the Internal Revenue Service to figure
the taxable part of your annuity payments. This is treated as a
request for a ruling. See Requesting a Ruling on Taxation of
Annuity at the end of this publication.
Withholding tax and estimated tax.
Your pension or annuity is subject to federal income tax
withholding unless you choose not to have tax withheld. If you choose
not to have tax withheld from your pension or annuity, or if you do
not have enough income tax withheld, you may have to make estimated
tax payments.
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