How are pensions taxed?


Quick Answer

Payments, either from private or government pensions, are taxed at the taxpayer's ordinary income rate if the taxpayer did not make any after-tax contributions, received all the contributions in full in prior years or the taxpayer's employer did not withhold contributions from his salary. Pensions are partially taxable only if the taxpayer made after-tax contributions to his pension or annuity, according to the Internal Revenue Service. States may also tax a portion of the taxpayer's pension.

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Full Answer

If the taxpayer receives his annuity payments before the age 59 1/2, he may pay an additional 10 percent on early distributions, unless the pension payouts are exempted. The exemptions to the additional 10 percent tax for early distributions include distributions that are made to totally or permanently disabled taxpayers, distributions made as part of substantially equal payments that starts after the taxpayer's separation from service, distributions made after the date of the plan participant or account holder and distributions made after the taxpayers separation from service in or after the year he reached the age of 55.

If the taxpayer pays the taxes via withholding and the withholding tax is inadequate, he may be required to make additional tax payments to make up for the deficit. This ensures that the taxpayer does not underpay his taxes for the tax year, according to the IRS.

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