Pensions are very similar to retirement accounts, especially when it comes to taxes. In fact, the IRS bundles both of these together when explaining their tax laws, so when you have a question about your pension, it is often just the same to refer to their retirement protocols.
The biggest questions asked regarding pensions and taxes is whether or not your pension will be taxed. The short answer is yes. All or some portion of the pension you receive from your employer are subject to be taxes. Most pensions are fully taxable, but not all. Pensions that are fully taxed are pensions where the employee does not have an investment in the contract. This means that they didn’t contribute anything to the pension, they were not withheld any part of their salary for the pension or they received contributions from the pension tax-free in years prior.
If you did contribute money to your pension, then you will most likely only owe partial taxes. You can work with a tax professional and use the Simplified Method to determine exactly how much you owe if you feel you only owe a partial amount.
There are a few cases, though, where you may owe even more than your taxable pension amount. If you receive payments before you turn 59.5, the IRS may charge you an early distribution fee of 10 percent. Early distributions aren’t always taxed, though. If you are disabled, the money was given to you after the death of a plan participant or you left the service after you reached 55, you won’t be taxed the extra 10 percent.
Pensions are a great thing to have and those who receive a pension should feel proud of what they earned. But, just like our income, they do not come without the burden of taxes. If you have a pension and are concerned about your tax return or paying the appropriate taxes, contact Levy Tax & Associates to learn more about how they can help you. Contact us at 1-800-TAX-LEVY or visit our website to learn more.