Pensions. Fully taxable? Partially?
 

I'm ok with social security. There's a simple worksheet in the 1040 instructions that determines, based on your other income, how much of your SS is taxable, and how much is tax free. I'm also totally ok with New York (virtually all retirement income in NYS is tax free, so long as your income is low or moderate.)

But I now remember that I tried last year, and gave up the attempt, to figure out the basic concepts of IRS tax of retirement pensions, annuities and such. Our main sources are my wife's NYS pension and my two TIAA annuities. (After age seventy more will come into play with RMD.) I know the IRS has a tax topic and other publications on this issue, and there's the "simplified method" worksheet in the 1040 instructions.

The simplified method requires my cost basis in the annuity. But all the money that purchased the annuity was either pre tax earnings, or matching funds from my employer, so that's why last year I assumed the annuity income was fully taxable.

Anyone else understand this topic?

Re: Pensions. Fully taxable? Partially?
 

Publication 575, Pension & Annuity Income seems to answer this, I think. (I suspect I did this research last year, but failed to make a note about it.)

https://www.irs.gov/publications/p57...link1000226752

Here's a quote about defining cost in the account;

"In general, your cost is your net investment in the contract as of the annuity starting date (or the date of the distribution, if earlier). To find this amount, you must first figure the total premiums, contributions, or other amounts you paid. This includes the amounts your employer contributed that were taxable to you when paid. (However, see Foreign employment contributions , later.) It doesn't include amounts withheld from your pay on a tax-deferred basis (money that was taken out of your gross pay before taxes were deducted)"

I added the bold in the above quote. Since my contributions were tax deferred, I think it's safe to assume that the whole amount of the annuity is taxable.

Re: Pensions. Fully taxable? Partially?
 

Do the 1099-Rs of those pensions not indicate how much is taxable? The 2 1099-Rs I receive for my annuities are fully taxable as it was all pre-tax money that funded them but I recall from my days as a volunteer tax preparer in 2010 coming across annuities where part of the sum paid out was a return of after tax principle and the information was within the 1099-R for that year’s payment.

I would think that feeding the data from a 1099-R into TurboTax would determine the taxable amount.

Re: Pensions. Fully taxable? Partially?
 

You're confirming what I think is the case, that they're fully taxable, because in each case, box 5 of the 1099-R (Employee contribution) is $0.00, because all of my contribution was pre-tax money. I'm pretty sure now that that was what I concluded last year, but forgot to write it up in my notes. Senior moment!

Thanks!

Re: Pensions. Fully taxable? Partially?
 

I thought it about over night, jogging the old memory from 7 years ago, and I’m pretty sure that box 5 is the key. Over time the amount in that box goes down. e.g. if an annuity has a value of $100k at the start of the year, the contribution box shows $10k and the withdrawal is $10k (10% of the total) then $9k will show as taxable and the following year the employee contribution box will show as $9k.

Re: Pensions. Fully taxable? Partially?
 

I see you two have correctly reached a conclusion, so I'll add a few more light hearted comments:

I compute the Simplified Method each year, but I cannot use the Simplified Method on my return. I do it simply for comparison.

The IRS, strangely, has instituted the Simplified Method in order to prevent taxpayers from being doubly taxed on the same funds (funds contributed and benefit funds). A calculation must be made for each individual pension, but once the offset is determined for each pension (if any), the offsets may be aggregated for the deduction.

The Simplified Method can only be used for qualified pensions, or for pensions meeting certain specified dates. This is where I fall down. Qualified pensions, generally, can only be made in America pensions. I say generally, because, probably somewhere, there is a pension fund established outside the US that oddly makes an effort to concur with all the American requirements. I've never heard of one.

All non-made in America pensions (non-qualified pensions) must use the General Method to determine an offset (if any). A UK company pension will most likely be a non-qualified pension.

Anyone with a UK non-qualified pension who also filed a US tax return at the time of contributions, may have the ability to offset their contributions, depending on how they treated the contributions in relation to the Treaty, and thereby may have established a basis in the pension. Think about that one.

I mentioned I do the SM for comparison and the results are different, but with less than 15% of variance per year. The Simplified Method, for me, is more generous yearly, but the ability to use the offset expires earlier.

Yes, you can not use the SM (nor the GM) forever. An extremely simple example. Say your after tax contributions to the pension were $10,000 and you can offset $1,000 every year on your return. After 10 years, you would no longer be able to use the method. Your offsets can never be larger than your total original offsetting contributions. Normally, the period is between 20 to 30 years, but of course, it could vary with each individual.

If the pension allows beneficiaries, you use different figures for the calculation (both methods). If using the General Method, no where does it specify on the worksheet the $US must be used, although there is probably some general rule that says you always use $US on worksheets.

A resident of the UK who pays UK tax on the arising basis may declare the US Social Security as income only in the UK, according to the Treaty. If that is the chosen method, the resulting UK tax credits from the SS payments can not then be used as an offset on a 1116.

Unlike the UK, the US does not double tax SS-type pension payments. The General Method, generally, can not be used for NICs contributed to the UK State Pension. Class III contributions are not dedicated to your UK State Pension and may be used for a variety of programmes. Can the same be said for all other Classes of contributions?

Note; To use the either the Simplified Method or the General Method, you must start calculations and offsets in the first year of receiving the pension. You cannot start using the method(s) at a later time.

As always, ALL IMHO!

Re: Pensions. Fully taxable? Partially?
 

Thanks OAP. Robin was asking about US pensions and annuities from TIAA hence the simplicity of our discussions.

I receive 2 UK pensions which I declare as non-qualified pensions on my IRS returns and create substitute 1099-R's for them. I know for a fact that all my contributions to them were pre-tax in the UK so I am pleased to not have to attempt to go through the methods you provide. Maybe there is something I could do since my contributions were made before I moved to the USA (and I will be WEP'ed on them as I don't have 30 years of SS contributions) but I really don't have the energy or willpower to pursue it. Now that I am back in England both pensions are fully taxed by HMRC as well and I take credits against my US returns.

Re: Pensions. Fully taxable? Partially?
 

Yes, this all makes sense, thanks both. I guess where my initial uncertainty arose is this. I had thought, apparently in error, that a qualified pension only included tax advantaged contributions from the employee and the employer. I didn't realise it could also include already taxed income.

So, being a bit confused about the very basis of the IRS instructions and explications, I thought that perhaps TIAA had not filled out the 1099 completely, and the box 5 entry was not a good guide to my actual cost.

Re: Pensions. Fully taxable? Partially?
 

Well yes, I have British pensions too, on the small side, I simply treat them as fully taxable just to get the job done and not introduce further complications.

Re: Pensions. Fully taxable? Partially?
 

Exactly :lol:

These days I even walk past small coins I see in the road. A few years ago I would have ventured onto a busy highway to grab a 10p coin.

Re: Pensions. Fully taxable? Partially?
 

I started a reply when Robin first put forward this question, but abandoned it when I realised it would only complicate matters. The concept of the offset is simple, but it can become less simple for some.

This is where things get a bit more complicated.

Many people on this site will be affected, at one time or another, with the possibility of an offset.

In the case detailed above there is one guiding fact. Whether the contributions to a UK pension were pre-tax or after tax in the UK has no bearing in either method. The only consideration is were the contributions subject to US taxation at the time they were made.

A UKC only person who relocates to the US, and has prior contributions to a UK pension scheme, will not be able to consider those contributions for either method since, it is assumed, they, at the time, had no US reporting responsibility, and therefore no ability to declare after tax contributions on a US return. (There are possibilities where this is not true; for example, they agreed to be subject to US taxation on a joint return with a US spouse resident in the UK.)

A UKC only person who relocates to the US, takes out US citizenship, and then returns to the UK, and at that point, starts contributions to a UK pension scheme, will have a US reporting responsibility. This is where the Treaty and how they declare the contributions on their US return comes into force for eventual consideration of the ability to utilise the General Method (or possibly both methods).

A USC (or, eventually, dual citizen) resident in the UK will have always had this consideration.

A UKC, resident in the US, will in most cases be unable to contribute to a UK (company or private) pension scheme while resident in the US. There may be exceptions.

My interest in all this? I have 5 non-US, non-qualified pensions of which 4 I consider for the General Method, and I was a USC when contributing to them. (The one I don't concern myself with is the UK State Pension, and pay full tax in the US on it, even though the Treaty is unclear concerning the taxation of the UK SP by the US for a UK resident. That's clear, isn't it? :lol: )