7.26 Reporting Employee Annuities

Tax treatment of employee annuity payments from a qualified employee plan, qualified employee annuity, or tax-sheltered annuity (7.21) depends on the amount of your contributions and your annuity starting date. These rules are discussed in 7.26 − 7.29. If payments are from a nonqualified employee plan, you must use the rules for commercial annuities (7.23).

Fully taxable payments if you have no investment in the plan.

If you did not contribute to the cost of a pension or employee annuity, and you did not report as income your employer’s contributions, you are fully taxed on payments after the annuity starting date. On your 2012 return, you report fully taxable payments on Line 16b of Form 1040 or Line 12b of Form 1040A.

Filing Tip

Deducting Repaid Pension Overpayment

If you pay tax on a pension distribution and in the next year the plan determines that there was an overpayment, which you repay, the repayment may be deductible. If the repayment is $3,000 or less, it is deductible as a miscellaneous itemized deduction subject to the 2% floor (19.1), which may limit or eliminate the deduction. If the repayment exceeds $3,000, you may claim either a miscellaneous deduction not subject to the 2% floor, or if it would provide a lower tax for the year of repayment, a tax credit based on a recomputation of the prior year’s tax (2.9).

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An employee is taxed on the full value of a nonforfeitable annuity contract that the employer buys him or her if the employer does not have a qualified pension plan. Tax is imposed in the year the policy is purchased. A qualified plan is one approved by the IRS for special tax benefits.

Disability pension before minimum retirement age.

Disability payments received before you reach the minimum retirement age (at which you would be entitled to a regular retirement annuity) are fully taxable as wages. After minimum retirement age, payments are treated as an annuity (7.27).

Partially taxable payments if you have an investment in the plan.

If you and your employer both contributed to the cost of your annuity, the part of each payment allocable to your investment is tax free and the balance is taxable. You generally must use the simplified method to figure the tax-free portion allocable to your investment (7.27). For withdrawals before the annuity starting date, see 7.29.