How to Determine Tax on Annuity Income

If you receive income from one or more annuities, the taxable amounts can vary based on how much you invested in the annuity contracts. Any amounts that you received from an employer plan where you did not contribute to the annuity are fully taxable in the year received. If you invested in the annuity, you are not taxed on the amounts received that are deemed a return of your costs.

Difficulty: Moderately Easy

Instructions

1. Determine the total annuity amounts received for a tax year by adding together the amounts on Form 1099 or other statements received.

2. Enter the total on Line 16a of Form 1040 or on Line 12a of Form 1040A, depending on which tax form is used.

3. Compute your cost or investment in the annuity contracts which includes everything that you paid plus any amounts that your employer paid that were included in your taxable income when they were paid. Investment in the annuities does not include any amounts that you excluded from income or that you deducted from income.

4. Divide the invested cost among the expected number of payments for the life of the annuity. Use the General Rule in IRS Pub 939, if the contract is part of a nonqualified plan, such as a private annuity, or a nonqualified employee plan. If the contract is part of a qualified plan, compute the costs applicable to each payment by using the Simplified Method in IRS Pub 575.

5. Multiply the invested cost applicable to each payment, as computed in Step 4, by the number of payments received during the year to arrive at the total exclusion from income.

6. Subtract the total excludable amount from the total annuity payments received during the year to determine the taxable annuity amount.

7. Report the taxable amount on Line 16b of Form 1040 or on Line 12b of Form 1040A.

Tips & Warnings

• Complete Steps 4 to 6 even if Form 1099 or other statements you receive reflect the taxable amount so that they are checked for accuracy.

Resources

• Complete and print Form 1040 on the IRS website.