Is My Pension Taxable?

If you are receiving a pension or annuity, then you may likely wonder if the amount you are earning is taxable. Come tax time, this may impact whether you need to file a tax return, and if you will owe on your return.

One easy way to determine taxability is to check to see if you are already having taxes withheld from your pension. If so, it is likely going to be taxable. If you were asked by your former employer or plan administrator to complete a Form W-4P Withholding Certificate for Pension or Annuity Payments, this is also a good indication that yes, your pension is subject to tax.

Absent that, here are 5 questions that you can use to help determine if your pension is taxable.

1. Was the distribution from a qualified retirement plan or a non-qualified annuity?

According to the IRS, a qualified retirement plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries upon retirement. It qualifies for special tax benefits, such as tax deferral for employer contributions. To determine whether your plan is a qualified plan, check with your employer or the plan administrator.

If the answer is yes, continue with question 2.

2. Was the distribution from a disability pension?

You may be receiving disability payments because you retired on disability and did not yet reach the minimum retirement age.

Unless an exception applies, such as for a retired police officer of firefighter who was injured in the line of duty, or benefits received from a terrorist attack or an injury from serving in the military, if you have not reached the minimum retirement age as defined by the pension plan, your pension is likely taxable.

If you are receiving a disability pension, the general rule is that if you paid the premiums, the benefits are not taxable. If your employer paid the premiums, the benefits would be considered taxable to you.

3. Did you contribute to your pension with post-tax dollars?

If you contributed into your plan with funds that were already taxed through your employee pay, then payments you receive later in the form of annuity payments are likely not taxable on your tax return. Essentially, this is because you are just getting a return of your own after-tax dollars that were allocated to the plan. This would also include any amounts your employer contributed that were taxed to you at the time they were paid.

4. Do any of the following apply? If so, your pension is fully taxable:

If you did not contribute anything into the pension or annuity, your pension is generally taxable. If your employer did not withhold contributions from your salary for the purpose of funding the pension plan, it also is generally taxable.

5. Is there a tax penalty if I take a distribution from my pension before I reach age 59 ½?

The IRS says that yes, there is.

If you receive a pension or annuity payment before the minimal age, the 10% tax on early distributions applies unless you meet one of the qualifying exceptions.

For a listing of the exceptions, as well as additional information regarding pension and annuity distributions, see IRS Publication 575, Pension and Annuity Income.

More from this Contributor:

Are you considering taking an early IRA distribution?

Seniors get free tax assistance at IRS sites

Don't fall for these four tax myths