Pensions and Annuities
The new tax law generally didn’t change the taxation of pension and annuities, but added a new disaster tax relief provision.
Pension and annuity payments include amounts received from 401(k), 403(b), and governmental 457(b) plans.
If you have a pension or annuity, then you are fully taxed on the amounts received which exceed your cost in the pension or annuity. Your cost is your net investment in the plan as of the annuity starting date (or the date of the distribution, if earlier).
If you haven’t recovered your cost, then depending on your circumstance, you’ll be partially taxed or not taxed at all on the amounts received. For full rules, see IRS Publication 575: Pension and Annuity Income; 1040 Instructions: Line 16.
Certain types of pensions and annuities aren’t subject to taxation upon distribution. For instance, qualified distributions received under a Roth 401(k) plan aren’t taxable.
If you received a payment from a pension or annuity, then you should’ve received an IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with Box 1 indicating the total amount of your pension/annuity payments before income tax or other deductions were withheld.
The new tax law generally didn’t change the taxation of pension and annuities.
However, it did provide tax relief to taxpayers affected by federally declared disasters that occurred in 2016. Eligible taxpayers are exempt from the 10 percent additional tax imposed on early withdrawals from an eligible retirement plan if the withdrawal qualifies as a disaster distribution, and can include disaster distributions in gross income over three years.
How will this affect me?
Bedford purchases a 10-year annuity in 2016 for $12,000. The annuity plan pays $120 a month (or $1,200 a year). Bedford excludes a portion of the $120 every month. His annuity payments become fully taxable when he has recovered the cost of his investment, that is, $12,000. Bedford reports on lines 16a and 16b the total amount of the annuity payment as well as the taxable amount shown on IRS Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc..