Pension & Annuity Tax Calculator

How the IRS Simplified Method works

Most pension and annuity payments are partly a return of the after-tax money you put into the plan (your "cost" or "investment in the contract") and partly investment earnings and pre-tax contributions that have never been taxed. The IRS Simplified Method — Worksheet A in Publication 575 — spreads the tax-free recovery of your cost evenly over your expected remaining lifetime (or the combined life expectancy of you and a survivor annuitant), so the tax-free dollar amount stays constant every month even though the taxable dollar amount grows as inflation or COLAs increase your gross payment.

The mechanics: divide your total cost in the plan by a divisor — the "number of expected monthly payments" — read off an IRS table keyed to your age (single-life annuity) or your combined ages with a survivor annuitant (joint and survivor annuity), both measured on the annuity starting date. That quotient is the tax-free amount of every monthly payment until the cumulative tax-free amounts equal your full cost. After that, 100% of each payment is taxable.

You must generally use the Simplified Method if your annuity starting date is after November 18, 1996 and your payments come from a qualified employee plan, a qualified employee annuity, or a tax-sheltered 403(b) annuity, and either you were under age 75 on the annuity starting date or your annuity guarantees fewer than 5 years of payments. Nonqualified annuities (e.g., a commercial annuity bought directly from an insurance company) generally use the General Rule instead, which relies on the actuarial tables in IRS Publication 939 and is not covered by this calculator.

Table 1 — single-life annuity (Worksheet A, line 3)

Applies when the annuity is payable over your life alone. Enter the row for your age at the annuity starting date (annuity starting dates after November 18, 1996).

Table 2 — combined ages, joint and survivor annuity (Worksheet A, line 3)

Applies when the annuity is payable over the lives of more than one annuitant. Combine your age and your survivor annuitant's age, both as of the annuity starting date (annuity starting dates after 1997; use Table 1 with the primary annuitant's age if the starting date was in 1997 or earlier).

Source: IRS Publication 575 (2025), "Worksheet A. Simplified Method," Table 1 and Table 2 (p. 43). These tables are set by statute (Small Business Job Protection Act of 1996) and are not inflation-adjusted — the same figures apply for the 2025 and 2026 tax years.

Two worked examples

Numbers generated from the same calculator engine used above.

In the Bill Smith example, if Bill and his spouse both die before 310 combined monthly payments have been made, an itemized deduction is allowed on the final income tax return of the last to die for whatever cost remains unrecovered.

Cost recovery, full taxability, and death before recovery

• Recovery is linear and capped at cost. The monthly tax-free amount is constant, but the total excluded over the life of the annuity can never exceed your cost/investment in the contract. Once cumulative exclusions hit that ceiling — after roughly the "expected number of payments" months — every later payment is fully taxable, even if you're still alive and receiving the annuity for years afterward.
• Guaranteed refund features don't change the math. If your contract guarantees a minimum number of payments or a minimum dollar amount, that guarantee affects whether you're eligible for the Simplified Method (see the "fewer than 5 years of guaranteed payments" test above) but not the divisor itself, which always comes from Table 1 or Table 2.
• Unrecovered cost at death is deductible. If you (or the last surviving annuitant under a joint and survivor annuity) die before recovering your full cost, the unrecovered balance is allowed as an itemized deduction on the decedent's final Form 1040 — it is not simply lost.
• Keep last year's worksheet. The IRS worksheet is designed to be reused every year: this year's "amount recovered tax-free" total (line 10) becomes next year's starting point (line 6), so once you've completed it once, next year's version only needs your new payment total.

Sources

• IRS Publication 575 — Pension and Annuity Income (Simplified Method)
• IRS Publication 939 — General Rule for Pensions and Annuities
• IRS Instructions for Form 1040 (Line 5a/5b, pensions and annuities)
• IRS Topic No. 411 — Pensions and the General Rule/Simplified Method