Pension and Annuity Income: The Simplified Method
Published November 6, 2026
Part of each pension or annuity payment may be a return of the cost you paid into the plan. The rest is taxable. Publication 575 (2025) describes how to split the two. This guide is general information. It is not advice about your return.
Your cost comes back first
Publication 575 says you can exclude part of each annuity payment from income as a recovery of your cost. The excluded part is figured when the annuity starts, and it stays the same each year even if the payment amount changes. The rest of each payment is taxable.
You choose the method when you first begin receiving the annuity. You keep using it each year you recover part of your cost.
Who must use the simplified method
Publication 575 says you must use the simplified method if your annuity starting date is after November 18, 1996, and both of these apply:
- You receive payments from a qualified employee plan, a qualified employee annuity, or a 403(b) tax-sheltered annuity plan.
- On your annuity starting date, you are under age 75, or you are entitled to fewer than 5 years of minimum payments (payments made even if you and any survivor do not live to receive them).
If the annuity comes from a nonqualified plan, Publication 575 says you must use the General Rule instead. You cannot use the simplified method for it.
How the method works
Under the simplified method, you divide your cost by the total number of expected monthly payments. Publication 575 also says the annuity starting date sets the recovery period, and the date you first complete the worksheet does not change it. For an annuity paid over one or more lives, Publication 575 says that number comes from a table based on the annuitants' ages on the annuity starting date. For any other annuity, it is the number of monthly payments under the contract.
You complete Worksheet A in Publication 575 for the year. Keep the completed worksheet. If you used last year's worksheet, Publication 575 says to enter last year's line 4 amount on line 4 of this year's worksheet.
An example from the publication
Publication 575 uses this example. You exclude $100 a month, or $1,200 a year, and your total cost is $12,000. The exclusion ends after 10 years, or 120 months. After that, the payments are generally fully taxable.
The exclusion for an annuity that started after 1986 cannot be more than your total cost. Once you have recovered your cost, the rest of each payment is taxable.
Where the taxable part goes
Publication 575 says you report total distributions on Form 1040, line 5a, and the taxable amount on line 5b. The Form 1099-R you receive shows the payments. Our guide to Form 1099-R retirement distributions explains that form.
If the annuitant dies early
Publication 575 says that if you die before you recover your full cost, the unrecovered cost is allowed as an itemized deduction on the final return of the decedent. Publication 575 Example 2 uses this case: a death after the eighth year of retirement, with $9,600 recovered (8 × $1,200) and $2,400 unrecovered, from a $12,000 cost. Keep the completed worksheet so the amount recovered is easy to show.
Simple steps
- Find your annuity starting date and your total cost in your plan papers.
- Check whether you must use the simplified method, based on the plan type and your age.
- Complete Worksheet A for the year and keep it.
- Report the total on Form 1040, line 5a, and the taxable part on line 5b.
Upload your documents and answer a few simple questions. Your preparer reviews every deduction and credit and lets you know when your return is ready to sign.
Sources: Sources: IRS, Publication 575 (2025), Pension and Annuity Income (https://www.irs.gov/pub/irs-pdf/p575.pdf) This is general information, not advice about your specific return.
