Publication 575 - Pension And Annuity Income - 2002 Page 9
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34separately), substitute 110% for 100% in (2) above. For
a refund of the annuity’s cost will be made to your
more information, get Publication 505, Tax Withholding
beneficiary or estate if all annuitants die before a
and Estimated Tax.
stated amount or a stated number of payments are
made. For more information, see Publication 939.
In figuring your withholding or estimated tax, re-
TIP
member that a part of your monthly social security
The tax treatment of the items described in (1) through (3)
or equivalent tier 1 railroad retirement benefits
above is discussed later under Taxation of Nonperiodic
may be taxable. See Publication 915. You can choose to
Payments.
have income tax withheld from those benefits. Use Form
Form 1099 – R. If you began receiving periodic
W – 4V, Voluntary Withholding Request, to make this
TIP
payments of a life annuity in 2002, the payer
choice.
should show your total contributions to the plan in
box 9b of your 2002 Form 1099 –R.
Cost (Investment
Annuity starting date defined. Your annuity starting
date is the later of the first day of the first period for which
in the Contract)
you received a payment or the date the plan’s obligations
became fixed.
Distributions from your pension or annuity plan may in-
Example. On January 1, you completed all your pay-
clude amounts treated as a recovery of your cost (invest-
ments required under an annuity contract providing for
ment in the contract). If any part of a distribution is treated
monthly payments starting on August 1 for the period
as a recovery of your cost under the rules explained in this
beginning July 1. The annuity starting date is July 1. This is
publication, that part is tax free. Therefore, the first step in
the date you use in figuring the cost of the contract and
figuring how much of a distribution is taxable is to deter-
selecting the appropriate number from the table for line 3 of
mine the cost of your pension or annuity.
the Simplified Method Worksheet.
In general, your cost is your net investment in the
contract as of the annuity starting date (or the date of the
Foreign employment contributions. If you worked
distribution, if earlier). To find this amount, you must first
abroad, your cost includes amounts contributed by your
figure the total premiums, contributions, or other amounts
employer that were not includible in your gross income.
you paid. This includes the amounts your employer con-
This applies to contributions that were made either:
tributed that were taxable when paid. (Also see Foreign
employment contributions, later.) It does not include
1) Before 1963 by your employer for that work,
amounts withheld from your pay on a tax-deferred basis
2) After 1962 by your employer for that work if you
(money that was taken out of your gross pay before taxes
performed the services under a plan that existed on
were deducted). It also does not include amounts you
March 12, 1962, or
contributed for health and accident benefits (including any
additional premiums paid for double indemnity or disability
3) After 1996 by your employer on your behalf if you
benefits).
performed the services of a foreign missionary (a
From this total cost you must subtract the following
duly ordained, commissioned, or licensed minister of
amounts.
a church or a lay person).
1) Any refunded premiums, rebates, dividends, or un-
repaid loans that were not included in your income
Taxation of
and that you received by the later of the annuity
starting date or the date on which you received your
Periodic Payments
first payment.
2) Any other tax-free amounts you received under the
This section explains how the periodic payments you re-
contract or plan by the later of the dates in (1).
ceive from a pension or annuity plan are taxed. Periodic
payments are amounts paid at regular intervals (such as
3) If you must use the Simplified Method for your annu-
ity payments, the tax-free part of any single-sum
weekly, monthly, or yearly) for a period of time greater than
payment received in connection with the start of the
one year (such as for 15 years or for life). These payments
are also known as amounts received as an annuity. If
annuity payments, regardless of when you received
it. (See Simplified Method, later, for information on its
you receive an amount from your plan that is not a periodic
payment, see Taxation of Nonperiodic Payments, later.
required use.)
In general, you can recover the cost of your pension or
4) If you use the General Rule for your annuity pay-
annuity tax free over the period you are to receive the
ments, the value of the refund feature in your annuity
payments. The amount of each payment that is more than
contract. (See General Rule, later, for information on
the part that represents your cost is taxable.
its use.) Your annuity contract has a refund feature if
the annuity payments are for your life (or the lives of
you and your survivor) and payments in the nature of
Page 9
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