Annuities and Pension Plan Installment Payments

Generally, amounts distributed by a qualified retirement plan or annuity are taxable to the recipient as ordinary income in the year they are received. The big exception to this rule is that, if the taxpayer made any nondeductible or after-tax contributions to the plan, a portion of each payment will be tax-free, to reflect the amount of his or her contributions.

If you received pension or annuity payments during the year, you should receive an information return, Form 1099-R, from the plan sponsor. This form shows the gross amount of the payments in Box 1, the taxable amount in Box 2a, and the amount of federal income tax withheld (if any) in Box 4. If any tax was withheld, you'll have to attach a copy of the 1099-R to your tax return.

The taxable amount in Box 2a is generally the amount of income you must report on Line 16b of your 1040 or Line 12b of the 1040A, although in some cases you will need to modify these amounts. If your pension was fully taxable, leave Line 16a or 12a blank; these lines are used only if some portion of the payment represents a return of your original after-tax investment in the plan.

The plan sponsor, insurance company, or other payer will withhold federal income tax from your pension or annuity payments unless you specify in writing that you choose not to have tax withheld. If you don't want tax to be withheld on these payments (or if you need to change the withholding amount), notify the payor. You will generally be asked to fill out a form (IRS Form W-4P, or a substitute) showing your correct address and Social Security number. If there is no withholding on your pension, you may need to make quarterly estimated federal tax payments.

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