US Internal Revenue Service: p575--1999

8/14/2019 US Internal Revenue Service: p575--1999

1/40

ContentsImportant Changes ........................................... 1

Introduction ........................................................ 2

General Information ........................................... 3Variable Annuities ............................................ 4Section 457 Deferred Compensation Plans .... 4Railroad Retirement ......................................... 5Withholding Tax and Estimated Tax ............... 7

Taxation of Periodic Payments ........................ 8Investment in the Contract (Cost) ................... 8Fully Taxable Payments .................................. 9Partly Taxable Payments ................................. 9Simplified Method ............................................ 10

Disability Retirement ......................................... 13Disability Payments ......................................... 13Credit for Elderly or Disabled .......................... 13

Taxation of Nonperiodic Payments .................. 14Limits on Exclusion for Elective Deferrals ........ 16Loans Treated as Distributions ........................ 18Transfers of Annuity Contracts ........................ 18Lump-Sum Distributions .................................. 19

Rollovers ............................................................. 29

Survivors and Beneficiaries .............................. 31

Special Additional Taxes ................................... 32Tax on Early Distributions ............................... 32Tax on Excess Accumulation .......................... 33

How To Get More Information .......................... 36

Worksheet for Simplified Method ..................... 38Index .................................................................... 39

Important Changes

Hardship distributions no longer treated as eligiblerollover distributions. Beginning in 1999, hardshipdistributions from 401(k) plans and similar employer-sponsored retirement plans will no longer be treatedas eligible rollover distributions.

5-year tax option repealed after 1999. For tax years

beginning after 1999, the 5-year tax option for figuringthe tax on lump-sum distributions from a qualified re-tirement plan is repealed. However, a plan participantcan continue to choose the 10-year tax option or capitalgain treatment for a lump-sum distribution that qualifiesfor the special treatment. See the discussion on lump-sum distributions under Taxation of Nonperiodic Pay-ments.

Photographs of missing children. The Internal Rev-enue Service is a proud partner with the National Cen-ter for Missing and Exploited Children. Photographs ofmissing children selected by the Center may appear in

Department of the TreasuryInternal Revenue Service

Publication 57 5Cat. No. 15142B

Pensionand AnnuityIncome

For use in preparing

1999 Returns


2/40

this publication on pages that would otherwise be blank.You can help bring these children home by looking atthe photographs and calling 1800THELOST(18008435678) if you recognize a child.

IntroductionThis publication gives you the information you need todetermine the tax treatment of distributions you receive

from your pension and annuity plans and also showsyou how to report the income on your federal incometax return. How these distributions are taxed dependson whether they are periodic payments (amountsreceived as an annuity) that are paid at regular intervalsover several years or nonperiodic payments(amountsnot received as an annuity).

What is covered in this publication? Publication 575contains information that you need to understand thefollowing topics:

1) How to figure the tax-free part of periodic paymentsunder a pension or annuity plan, including using a

simple worksheet for payments under a qualifiedplan.

2) How to figure the tax-free part of nonperiodic pay-ments from qualified and nonqualified plans, andhow to use the optional methods to figure the taxon lump-sum distributions from pension, stock bo-nus, and profit-sharing plans.

3) How to roll over distributions from a qualified re-tirement plan or IRA into another qualified retire-ment plan or IRA.

4) How to report disability payments, and how benefi-ciaries and survivors of employees and retirees

must report benefits paid to them.5) When additional taxes on certain distributions may

apply (including the tax on early distributions fromqualified retirement plans and IRAs and the tax onexcess accumulation).

What is not covered in this publication? The fol-lowing topics are not discussed in this publication:

1) The General Rule. This is the method generallyused to determine the tax treatment of pension andannuity income from nonqualified plans (includingcommercial annuities). For a qualified plan, yougenerally cannot use the General Rule unless your

annuity starting date is before November 19, 1996.For more information on the General Rule, seePublication 939, General Rule for Pensions andAnnuities.

2) Individual retirement annuity contracts. Theseare annuity contracts issued by an insurance com-pany that follow IRA rules. See Publication 590,Individual Retirement Arrangements (IRAs) (In-cluding Roth IRAs and Education IRAs).

3) Civil service retirement benefits. If you are retiredfrom the federal government (either regular or dis-ability retirement) or are the survivor or beneficiary

of a federal employee or retiree who died, getPublication 721, Tax Guide to U.S. Civil ServiceRetirement Benefits. Publication 721 covers the taxtreatment of federal retirement benefits, primarilythose paid under the Civil Service Retirement Sys-tem (CSRS) or the Federal Employees' RetirementSystem (FERS).

4) Section 457 plans. If you are a state or local gov-ernment employee, or if you work for a tax-exempt

organization, you may be eligible to participate ina deferred compensation plan established undersection 457 of the Internal Revenue Code. Theseplans are nonqualified retirement plans. This publi-cation does not provide detailed information on thespecial rules of section 457 plans. However, theGeneral Informationsection of this publication con-tains a brief description of the main features ofsection 457 plans.

5) Tax-sheltered annuity (TSA) plans. If you work fora public school or certain tax-exempt organizations,you may be eligible to participate in a TSA retire-ment plan offered by your employer. Although thispublication covers the treatment of benefits under

TSA plans, it does not cover other tax provisionsthat apply to these plans. For further informationon TSAs, see Publication 571, Tax-Sheltered An-nuity Programs for Employees of Public Schoolsand Certain Tax-Exempt Organizations.

Help from IRS. You can get help from the employeeplans taxpayer assistance telephone service betweenthe hours of 1:30 p.m. and 3:30 p.m. Eastern Time,Monday through Thursday, at (202) 6226074. (Thisis not a toll-free number.)

TIPIf you are reading this publication to find outhow to report your pension or annuity payments

on your federal income tax return, be sure toreview the instructions on the back of Copy B of theForm 1099-R that you received and the instructions forlines 16a and 16b of Form 1040.

Useful ItemsYou may want to see:

Publication

524 Credit for the Elderly or the Disabled

525 Taxable and Nontaxable Income

560 Retirement Plans for Small Business (SEP,SIMPLE, and Keogh Plans)

571 Tax-Sheltered Annuity Programs for Em-ployees of Public Schools and Certain Tax-Exempt Organizations

590 Individual Retirement Arrangements (IRAs)(Including Roth IRAs and Education IRAs)

721 Tax Guide to U.S. Civil Service RetirementBenefits

939 General Rule for Pensions and Annuities

Page 2


3/40

Form (and Instructions)

1099-R Distributions From Pensions, Annuities,Retirement or Profit-Sharing Plans, IRAs,Insurance Contracts, etc.

4972 Tax on Lump-Sum Distributions

5329 Additional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities, Mod-

ified Endowment Contracts, and MSAsSee How To Get More Information, near the end of

this publication for information about getting thesepublications and forms.

General InformationSome of the terms used in this publication are definedin the following paragraphs.

A pension is generally a series of definitely deter-minable payments made to you after you retire fromwork. Pension payments are made regularly and arebased on certain factors, such as years of servicewith your employer or your prior compensation.

An annuity is a series of payments under a contractmade at regular intervals over a period of more thanone full year. They can be either fixed (under whichyou receive a definite amount) or variable (notfixed). You can buy the contract alone or with thehelp of your employer.

A qualified employee plan is an employer's stockbonus, pension, or profit-sharing plan that is for theexclusive benefit of employees or their beneficiaries.If the plan meets Internal Revenue Code require-

ments, it qualifies for special tax benefits, such astax deferral for employer contributions and rolloverdistributions, and capital gain treatment or the 5- or10-year tax option for lump-sum distributions (ifparticipants qualify).

A qualified employee annuity is a retirement an-nuity purchased by an employer for an employeeunder a plan that meets Internal Revenue Code re-quirements.

A tax-sheltered annuity (TSA) plan (often referredto as a 403(b) plan or a tax-deferred annuityplan) is a retirement plan for employees of publicschools and certain tax-exempt organizations.

Generally, a TSA plan provides retirement benefitsby purchasing annuity contracts for its participants.

A nonqualified employee plan is an employer'splan that does not meet Internal Revenue Code re-quirements for qualified employee plans. It does notqualify for most of the tax benefits of a qualified plan.

Types of pensions and annuities. Particular typesof pensions and annuities include:

1) Fixed period annuities. You receive definite

amounts at regular intervals for a specified lengthof time.

2) Annuities for a single life. You receive definiteamounts at regular intervals for life. The paymentsend at death.

3) Joint and survivor annuities. The first annuitantreceives a definite amount at regular intervals forlife. After he or she dies, a second annuitant re-ceives a definite amount at regular intervals for life.The amount paid to the second annuitant may ormay not differ from the amount paid to the firstannuitant.

4) Variable annuities. You receive payments thatmay vary in amount for a specified length of timeor for life. The amounts you receive may dependupon such variables as profits earned by the pen-sion or annuity funds, cost-of-living indexes, orearnings from a mutual fund.

5) Disability pensions. You retire on disability beforeyou reach minimum retirement age and receivedisability payments.

More than one program. You may receive employeeplan benefits from more than one program under asingle trust or plan of your employer. If you participatein more than one program, you may have to treat eachas a separate contract, depending upon the facts ineach case. Also, you may be considered to have re-ceived more than one pension or annuity. Your formeremployer or the plan administrator should be able to tellyou if you have more than one pension or annuitycontract.

Example. Your employer set up a noncontributoryprofit-sharing plan for its employees. The plan pro-

vides that the amount held in the account of each par-ticipant will be paid when that participant retires. Youremployer also set up a contributory defined benefitpension plan for its employees providing for the pay-ment of a lifetime pension to each participant after re-tirement.

The amount of any distribution from the profit-sharingplan depends on the contributions (including allocatedforfeitures) made for the participant and the earningsfrom those contributions. Under the pension plan,however, a formula determines the amount of the pen-sion benefits. The amount of contributions is theamount necessary to provide that pension.

Each plan is a separate program and a separate

contract. If you get benefits from these plans, you mustaccount for each separately, even though the benefitsfrom both may be included in the same check.

Qualified domestic relations order (QDRO). Aspouse or former spouse who receives part of thebenefits from a retirement plan under a QDRO reportsthe payments received as if he or she were a planparticipant. The spouse or former spouse is allocateda share of the participant's cost (investment in thecontract) equal to the cost times a fraction. The nu-merator (top part) of the fraction is the present valueof the benefits payable to the spouse or former spouse.

Page 3


4/40

The denominator (bottom part) is the present value ofall benefits payable to the participant.

A distribution that is paid to a child or dependentunder a QDRO is taxed to the plan participant.

What is a QDRO?A QDRO is a judgment, decree,or order relating to payment of child support, alimony,or marital property rights to a spouse, former spouse,child, or other dependent. The QDRO must containcertain specific information, such as the name and lastknown mailing address of the participant and each al-

ternative payee, and the amount or percentage of theparticipant's benefits to be paid to each alternate payee.A QDRO may not award an amount or form of benefitthat is not available under the plan.

Variable AnnuitiesThe tax rules in this publication apply both to annuitiesthat provide fixed payments and to annuities that pro-vide payments that vary in amount based on investmentresults or other factors. For example, they apply tocommercial variable annuity contracts, whether boughtby an employee retirement plan for its participants orbought directly from the issuer by an individual investor.Under these contracts, the owner can generally allocatethe purchase payments among several types of in-vestment portfolios or mutual funds and the contractvalue is determined by the performance of those in-vestments. The earnings are not taxed until distributedeither in a withdrawal or in annuity payments. The tax-able part of a distribution is treated as ordinary income.

For information on the tax treatment of a transfer orexchange of a variable annuity contract, see Transfersof Annuity Contracts under Taxation of NonperiodicPayments, later.

Withdrawals. If you withdraw funds before your an-

nuity starting dateand your annuity is under a qual-ified retirement plan, a ratable part of the amount with-drawn is tax free. The tax-free part is based on the ratioof your cost to your account balance under the plan.

If your annuity is under a nonqualified plan (includinga contract you bought directly from the issuer), theamount withdrawn is allocated first to earnings (thetaxable part) and then to your cost (the tax-free part).However, if you bought your annuity contract beforeAugust 14, 1982, a different allocation applies to theinvestment before that date and the earnings on thatinvestment. To the extent the amount withdrawn doesnot exceed that investment and earnings, it is allocatedfirst to your cost (the tax-free part) and then to earnings

(the taxable part).If you withdraw funds on or after your annuity

starting date, the entire amount withdrawn is generallytaxable.

The amount you receive in a full surrenderof yourannuity contract at any time is tax free to the extent ofany cost that you have not previously recovered taxfree. The rest is taxable.

For more information on the tax treatment of with-drawals, see Taxation of Nonperiodic Payments, later.If you withdraw funds from your annuity before youreach age 591/2, also see Tax on Early Distributionsunder Special Additional Taxes, later.

Annuity payments. If you receive annuity paymentsunder a variable annuity plan or contract, you recoveryour cost tax free under either the Simplified Methodor the General Rule, as explained under Taxation ofPeriodic Payments, later. For a variable annuity paidunder a qualified plan, you generally must use theSimplified Method. For a variable annuity paid under anonqualified plan (including a contract you bought di-rectly from the issuer), you must use a special compu-tation under the General Rule. For information, see

Variable annuities in Publication 939 under Computa-tion Under General Rule.

Death benefits. If you receive a single-sum distributionfrom a variable annuity contract because of the deathof the owner or annuitant, the distribution is generallytaxable only to the extent it is more than the unre-covered cost of the contract. If you choose to receivean annuity, the payments are subject to tax as de-scribed above. If the contract provides a joint and sur-vivor annuity and the primary annuitant had receivedannuity payments before death, you figure the tax-freepart of annuity payments you receive as the survivor in

the same way the primary annuitant did. See Survivorsand Beneficiaries, later.

Section 457 DeferredCompensation PlansIf you work for a state or local government or for atax-exempt organization, you may be eligible to partic-ipate in a section 457 deferred compensation plan. Youare not taxed currently on your pay that is deferredunder this plan. You or your beneficiary are taxed onthis deferred pay only when it is distributed or madeavailable to either of you.

Is your plan eligible? To find out if your plan is aneligible plan, check with your employer. The followingplans are nottreated as section 457 plans:

1) Bona fide vacation leave, sick leave, compensatorytime, severance pay, disability pay, or death benefitplans,

2) Nonelective deferred compensation plans for non-employees (independent contractors),

3) Deferred compensation plans maintained bychurches for church employees, or

4) Length of service award plans to bona fide volun-teer firefighters and emergency medical personnel.An exception applies if the total amount paid to avolunteer exceeds $3,000.

Tax treatment of plan distributions. A section 457plan is a nonqualified employee plan. Distributions ofdeferred pay are not eligible for the 5- or 10-year taxoption or rollover treatment, discussed later.

TIPA section 457 plan distribution is reported to youon Form W-2 (not on Form 1099-R), unless youare the beneficiary of a deceased employee.

Page 4


5/40

Limit on deferrals. The amount of compensation thatan eligible participant can elect to defer cannot exceedthe maximum deferrals discussed under Limits on Ex-clusion for Elective Deferrals, later.

Section 457 plan funding(trust requirement). Ifyou participate in a section 457 retirement plan that wasin existence on and after August 20, 1996, and youremployer is a state or local government, your employermust set aside the amounts deferred (including

earnings) in a trust, custodial account or annuity con-tract for your exclusive benefit. Plan assets are nolonger allowed to remain the property of the employerbefore they are made available to the plan participants.

Railroad RetirementBenefits paid under the Railroad Retirement Act fall intotwo categories. These categories are treated differentlyfor income tax purposes.

The first category is the amount of tier 1 railroadretirement benefits that equals the social security ben-efit that a railroad employee or beneficiary would havebeen entitled to receive under the social security sys-

tem. This part of the tier 1 benefit is the social securityequivalent benefit (SSEB), and you treat it for tax pur-poses like social security benefits. If you received orrepaid the SSEB portion of tier 1 benefits during 1999,you will receive Form RRB-1099, Payments by theRailroad Retirement Board (or Form RRB-1042S,Statement for Nonresident Aliens of: Payments by theRailroad Retirement Board, if you are a nonresidentalien) from the U.S. Railroad Retirement Board (RRB).

For more information about the tax treatment of theSSEB portion of tier 1 benefits and Forms RRB-1099and RRB-1042S, see Publication 915, Social Securityand Equivalent Railroad Retirement Benefits.

The second categorycontains the rest of the tier 1

railroad retirement benefits, called the non-social se-curity equivalent benefit (NSSEB). It also contains anytier 2 benefits, vested dual benefits, and supplementalannuity benefits. Treat this category of benefits, shownon Form RRB-1099-R, Annuities or Pensions by theRailroad Retirement Board,as an amount received froma qualified employee plan. This allows for the tax-free(nontaxable) recovery of employee contributions fromthe tier 2 benefits and the NSSEB part of the tier 1benefits. Vested dual benefits and supplemental annu-ity benefits are fully taxable. See Taxation of PeriodicPayments, later, for information on how to report yourbenefits and how to recover the employee contributionstax free.

Nonresident aliens. Form RRB-1099-R is used forU.S. citizens, resident aliens, and nonresident aliens.If you are a nonresident alien and your tax withholdingrate changed or your country of legal residencechanged during the year, you may receive more thanone Form RRB-1099-R. To determine your total paid,repaid, and tax withholding amounts for the year, youshould add the amounts shown on all FormsRRB-1099-R you received for that year. For informationon filing requirements for aliens, get Publication 519,U.S. Tax Guide for Aliens. For information on tax trea-ties between the United States and other countries that

may reduce or eliminate U.S. tax on your benefits, getPublication 901, U.S. Tax Treaties.

Form RRB-1099-R. The following discussion explainsthe items shown on Form RRB-1099-R. The amountsshown on this form are beforeany deductions for:

Federal income tax withholding,

Medicare premiums,

Garnishments, Assignment,

Recovery of a prior year overpayment of NSSEB,tier 2, VDB, or supplemental annuity benefits, and

Recovery of Railroad Unemployment Insurance Actbenefits received while awaiting payment of yourrailroad retirement annuity.

The amounts shown on Form RRB-1099-R do notreflect any special rules, such as capital gain treatmentor the special 5- or 10-year tax option for lump-sumpayments, or tax-free rollovers. To determine if any ofthese rules apply to your benefits, see the discussions

about them later.There are three copies of this form. Copy B is to beincluded with your income tax return. Copy C is for yourown records. Copy 2 is filed with your state, city or localincome tax return, when required. See the illustratedCopy B (Form RRB-1099-R) on the next page.

TIPEach beneficiary will receive his or her ownForm RRB-1099-R. If you receive benefits onmore than one railroad retirement record, you

may get more than one Form RRB-1099-R.

Box 1Claim Number and Payee Code. Yourclaim number is a six- or nine-digit number precededby an alphabetical prefix. This is the number underwhich the U.S. Railroad Retirement Board (RRB) paidyour benefits. Your payee code follows your claimnumber and is the last number in this box. It is usedby the RRB to identify you under your claim number.In all your correspondence with the RRB, be sure touse the claim number and payee code shown in thisbox.

Box 2Recipient's Identification Number. Thisis the social security number (SSN), individual taxpayeridentification number (ITIN), or employer identificationnumber (EIN), if known, for the person or estate listedas the recipient.

TIP

If you are a resident or nonresident alien who

must furnish a taxpayer identification number tothe IRS and are not eligible to obtain an SSN,

use Form W-7, Application for IRS Individual TaxpayerIdentification Number, to apply for an ITIN. The in-structions to Form W-7 explain how and when to apply.

Box 3Employee Contributions. This is theamount of taxes withheld from the railroad employee'searnings that exceeds the amount of taxes that wouldhave been withheld had the earnings been coveredunder the social security system. This amount is theemployee's investment in the contract (cost) that youuse to figure the tax-free part of the NSSEB and tier 2

Page 5


6/40

PAYERS NAME, STREET ADDRESS, CITY, STATE, AND ZIP CODE

UNITED STATES RAILROAD RETIREMENT BOARD

844 N RUSH ST CHICAGO IL 60611-2092

1999 ANNUITIES OR PENSIONS BY THERAILROAD RETIREMENT BOARDPAYERS FEDERAL IDENTIFYING NO. 36-3314600

FORM RRB-1099-R

COPY B -

REPORT THIS INCOME ON

YOUR FEDERAL TAXRETURN. IF THIS FORMSHOWS FEDERAL INCOMETAX WITHHELD IN BOX 9ATTACH THIS COPY TOYOUR RETURN.

THIS INFORMATION IS BEINGFURNISHED TO THE INTERNALREVENUE SERVICE.

1.

2.

Claim Number and Payee Code

Recipients Identification Number

Recipients Name, Street Address, City, State, and ZIP Code

3.

4.

5.

6.

7.

8.

9.

10. 11.

Employee Contributions

Contributory Amount Paid

Vested Dual Benefit

Supplemental Annuity

Total Gross Paid

Repayments

Federal Income TaxWithheld

Rate of Tax Country 12. Medicare Premium Total

payments you received (the amount shown in box 4).(For information on how to figure the tax-free part, seePartly Taxable Payments under Taxation of PeriodicPayments, later.) The amount shown is the total em-ployee contributions, not reduced by any amounts thatthe RRB calculated as previously recovered. It is thelatest amount reported for 1999 and may have in-creased or decreased from a previous FormRRB-1099R. If this amount has changed, you mayneed to refigure the tax-free part of your NSSEB/tier 2payments. If this box is blank, it means that the amountof your NSSEB and tier 2 payments shown in box 4 isfully taxable.

CAUTION!

If you had a previous annuity entitlement that

ended and you are figuring the tax-free part ofyour NSSEB/tier 2 payments for your current

annuity entitlement, you should contact the RRB forconfirmation of your correct employee contributionsamount.

Box 4Contributory Amount Paid. This is thegross amount of NSSEB and tier 2 benefits you re-ceived in 1999, less any 1999 benefits you repaid in1999. (Any benefits you repaid in 1999 for an earlieryear or for an unknown year are shown in box 8.) Thisamount is the total contributory pension paid in 1999and is usually partly taxable and partly tax free. Youfigure the tax-free part as explained in Partly TaxablePaymentsunder Taxation of Periodic Payments, later,using the amount of employee contributions shown inbox 4 as the investment in the contract (cost).

Box 5Vested Dual Benefit. This is the grossamount of vested dual benefit (VDB) payments paid in1999, lessany 1999 VDB payments you repaid in 1999.It is fully taxable. VDB payments you repaid in 1999 foran earlier year or for an unknown year are shown inbox 8.

Note. The amounts shown in boxes 4 and 5 mayrepresent payments for 1999 and/or other years after1983.

Box 6Supplemental Annuity. This is the grossamount of supplemental annuity payments paid in 1999,lessany 1999 supplemental annuity payments you re-paid in 1999. It is fully taxable. Supplemental annuitypayments you repaid in 1999 for an earlier year or foran unknown year are shown in box 8.

Box 7Total Gross Paid. This is the sum of boxes4, 5, and 6. The amount represents the total pensionpaid in 1999. Write this amount on line 16a of your Form1040, line 11a of your Form 1040A, or line 17a of yourForm 1040NR.

Box 8Repayments. This amount represents anyNSSEB, tier 2, VDB, and supplemental annuity pay-ments you repaid to the RRB in 1999 for years before1999 or for unknown years. The amount shown in thisbox has not been deducted from the amounts shownin boxes 4, 5, and 6. It only includes repayments ofbenefits that were taxable to you. This means it onlyincludes repayments of NSSEB benefits paid after1985, tier 2 and VDB benefits paid after 1983, andsupplemental annuity benefits paid in any year. If youincluded the benefits in your income in the year youreceived them, you may be able to deduct the repaidamount.

TIPYou may have repaid an overpayment of ben-efits by returning a payment, by making a cashrefund, or by having an amount withheld.

Box 9Federal Income Tax Withheld. This is thetotal federal income tax withheld from your NSSEB, tier2, VDB, and supplemental annuity payments. Includethis on your income tax return as tax withheld. If youare a nonresident alien and your tax withholding rateand/or country of legal residence changed during 1999,you will receive more than one Form RRB-1099-R for1999. Therefore, add the amounts in box 9 of all FormsRRB-1099-R you receive for 1999 to determine yourtotal amount of U.S. federal income tax withheld for1999.

Page 6


7/40

Box 10Rate of Tax. If you are taxed as a U.S.citizen or resident alien, this box does notapply to you.If you are a nonresident alien, an entry in this box in-dicates the rate at which tax was withheld on theNSSEB, tier 2, VDB, and supplemental annuity pay-ments that were paid to you in 1999. If you are a non-resident alien whose tax was withheld at more than onerate during 1999, you will receive a separate FormRRB1099R for each rate change during 1999.

Box 11Country. If you are taxed as a U.S. citizen

or resident alien, this box does notapply to you. If youare a nonresident alien, an entry in this box indicatesthe country of which you were a resident for tax pur-poses at the time you received railroad retirementpayments in 1999. If you are a nonresident alien whowas a resident of more than one country during 1999,you will receive a separate Form RRB-1099-R for eachcountry of residence during 1999.

Box 12Medicare Premium Total. This is for in-formation purposes only. The amount shown in this boxrepresents the total amount of Part B Medicare premi-ums deducted from your railroad retirement annuitypayments in 1999. Medicare premium refunds are notincluded in the Medicare total. The Medicare total is

normally shown on Form RRB-1099 (if you are a citizenor resident of the United States) or Form RRB-1042S(if you are a nonresident alien). However, if FormRRB-1099 or Form RRB-1042S is not required for1999, then this total will be shown on FormRRB-1099-R. If your Medicare premiums were de-ducted from your social security benefits, paid by a thirdparty, and/or you paid the premiums by direct billing,your Medicare total will not be shown in this box.

Help from the RRB. For assistance with questionsabout your Form RRB-1099-R, you should contact yournearest RRB field office (if you reside in the UnitedStates) or U.S. consulate/embassy (if you reside out-side of the United States). You may visit the RRB onthe Internet at www.rrb.gov.

Repayment of benefits received in an earlier year.If you had to repay any railroad retirement benefits thatyou had included in your income in an earlier year be-cause at that time you thought you had an unrestrictedright to it, you can deduct the amount you repaid in theyear in which you repaid it.

If you repaid $3,000 or less, deduct it on line 22 ofSchedule A (Form 1040). The 2%-of-adjusted-gross-income limit applies to this deduction. You cannot takethis deduction if you file Form 1040A.

If you repaid more than $3,000, you can either takea deduction for the amount repaid on line 27 ofSchedule A (Form 1040) or you can take a creditagainst your tax. For more information, see Repay-ments More Than Gross Benefitsin Publication 915.

Withholding Taxand Estimated TaxYour retirement plan payments are subject to federalincome tax withholding. However, you can choose notto have tax withheld on payments you receive unlessthey are eligible rollover distributions. If you choose not

to have tax withheld or if you do not have enough taxwithheld, you may have to make estimated tax pay-ments. See Estimated tax, later.

The withholding rules apply to the taxable part ofpayments you receive from:

An employer pension, annuity, profit-sharing, orstock bonus plan,

Any other deferred compensation plan,

An individual retirement arrangement (IRA), and A commercial annuity.

For this purpose, a commercial annuity means an an-nuity, endowment, or life insurance contract issued byan insurance company.

TIPThere will be no withholding on any part of adistribution that (it is reasonable to believe) willnot be includible in gross income.

These withholding rules also apply to disability pen-sion distributions received before your minimum retire-ment age. See Disability Retirement, later.

Choosing no withholding. You can choose not tohave income tax withheld from retirement plan pay-ments unless they are eligible rollover distributions.This applies to periodic and nonperiodic payments. Thepayer will tell you how to make the choice. This choiceremains in effect until you revoke it.

The payer will ignore your choice not to have taxwithheld if:

1) You do not give the payer your social securitynumber (in the required manner), or

2) The IRS notifies the payer, before the payment ismade, that you gave an incorrect social security

number.

To choose not to have tax withheld, a U.S. citizenor resident must give the payer a home address in theUnited States or its possessions. Without that address,the payer must withhold tax. For example, the payerhas to withhold tax if the recipient has provided a U.S.address for a nominee, trustee, or agent to whom thebenefits are delivered, but has not provided his or herown U.S. home address.

If you do not give the payer a home address in theUnited States or its possessions, you can choose notto have tax withheld only if you certify to the payer thatyou are not a U.S. citizen, a U.S. resident alien, or

someone who left the country to avoid tax. But if youso certify, you may be subject to the 30% flat ratewithholding that applies to nonresident aliens. This 30%rate will not apply if you are exempt or subject to areduced rate by treaty. For details, get Publication 519,U.S. Tax Guide for Aliens.

Periodic payments. Unless you choose no withhold-ing, your annuity or periodic payments (other than eli-gible rollover distributions) will be treated like wages forwithholding purposes. Periodic payments are amountspaid at regular intervals (such as weekly, monthly, oryearly), for a period of time greater than one year (such

Page 7


8/40

as for 15 years or for life). You should give the payera completed withholding certificate (Form W-4P or asimilar form provided by the payer). If you do not, taxwill be withheld as if you were married and claimingthree withholding allowances.

Tax will be withheld as if you were single and wereclaiming no withholding allowances if:

1) You do not give the payer your social securitynumber (in the required manner), or

2) The IRS notifies the payer (before any payment ismade) that you gave an incorrect social securitynumber.

You must file a new withholding certificate to changethe amount of withholding.

Nonperiodic distributions. For a nonperiodic distri-bution (a payment other than a periodic payment) thatis not an eligible rollover distribution, the withholding is10% of the distribution, unless you choose not to havetax withheld. You can use Form W-4P to elect to haveno income tax withheld. You can also ask the payer to

withhold an additional amount using Form W-4P. Thepart of any loan treated as a distribution (except anoffset amount to repay the loan), explained later, issubject to withholding under this rule.

Eligible rollover distributions. An eligible rolloverdistribution is any distribution of all or any part of thebalance to your credit in a qualified retirement plan ex-cept:

The nontaxable part of a distribution,

A required minimum distribution (described underTax on Excess Accumulation, later), or

Any of a series of substantially equal distributionspaid at least once a year over your lifetime or lifeexpectancy (or the lifetimes or life expectancies ofyou and your beneficiary), or over a period of 10years or more.

See Rollovers, later, for additional exceptions.Withholding. If you receive an eligible rollover dis-

tribution, 20% of it, will, generally, be withheld for in-come tax. You cannot choose not to have tax withheldfrom an eligible rollover distribution. However, tax willnot be withheld if you have the plan administrator paythe eligible rollover distribution directly to another qual-ified plan or an IRA in a direct rollover. See Rollovers,

later, for more information.

Estimated tax. Your estimated tax is the total of yourexpected income tax, self-employment tax, and certainother taxes for the year, minus your expected creditsand withheld tax. Generally, you must make estimatedtax payments for 2000 if your estimated tax, as definedabove, is $1,000 or more and you estimate that the totalamount of income tax to be withheld will be less thanthe lesser of 90% of the tax to be shown on your 2000return or 100% of the tax shown on your 1999 return.If your adjusted gross income for 1999 was more than$150,000 ($75,000 if married filing separately), substi-

tute 106% for 100%. For more information, get Publi-cation 505, Tax Withholding and Estimated Tax.

TIPIn figuring your withholding or estimated tax,remember that a part of your monthly socialsecurity or equivalent tier 1 railroad retirement

benefits may be taxable. See Publication 915, SocialSecurity and Equivalent Railroad Retirement Benefits.You can choose to have income tax withheld from thosebenefits. You must use Form W-4V, Voluntary With-

holding Request, to make this choice.

Taxation ofPeriodic PaymentsThis section explains how the periodic payments youreceive from a pension or annuity plan are taxed. Peri-odic payments are amounts paid at regular intervals(such as weekly, monthly, or yearly) for a period of timegreater than one year (such as for 15 years or for life).These payments are also known as amounts received

as an annuity. If you receive an amount from your planthat is not a periodic payment, see Taxation of Non-periodic Payments, later.

In general, you can recover the cost of your pensionor annuity tax free over the period you are to receivethe payments. The amount of each payment that ismore than the part that represents your cost is taxable.

Investment inthe Contract (Cost)The first step in figuring how much of your pension orannuity is taxable is to determine your cost (investmentin the contract). In general, your cost is your net in-

vestment in the contract as of the annuity starting date(defined next). To find this amount, you must first figurethe total premiums, contributions, or other amounts youpaid. This includes the amounts your employer con-tributed that were taxable when paid. (Also see Foreignemployment contributions, later.) It does not includeamounts you contributed for health and accident bene-fits (including any additional premiums paid for doubleindemnity or disability benefits) or deductible voluntaryemployee contributions.

From this total cost you must subtract the followingamounts.

1) Any refunded premiums, rebates, dividends, or

unrepaid loans that were not included in your in-come and that you received by the later of the an-nuity starting date or the date on which you re-ceived your first payment.

2) Any other tax-free amounts you received under thecontract or plan by the later of the dates in (1).

3) If you must use the Simplified Method for your an-nuity payments, the tax-free part of any single-sumpayment received in connection with the start of theannuity payments, regardless of when you receivedit. (See Simplified Method, later, for information onits required use.)

Page 8


9/40

4) If you use the General Rule for your annuity pay-ments, the value of the refund feature in your an-nuity contract. (See General Rule, later, for infor-mation on its use.) Your annuity contract has arefund feature if the annuity payments are for yourlife (or the lives of you and your survivor) and pay-ments in the nature of a refund of the annuity's costwill be made to your beneficiary or estate if allannuitants die before a stated amount or a statednumber of payments are made. For more informa-

tion, see Publication 939.

The tax treatment of the items described in (1) through(3) above is discussed later under Taxation of Nonpe-riodic Payments.

TIPForm 1099-R. If you began receiving periodicpayments of a life annuity in 1999, the payershould show your total contributions to the plan

in box 9b of your 1999 Form 1099-R.

Annuity starting date defined. The annuity startingdate is either the first day of the first period for whichyou receive payment under the contract or the date onwhich the obligation under the contract becomes fixed,whichever comes later.

Example. On January 1 you completed all yourpayments required under an annuity contract providingfor monthly payments starting on August 1 for the pe-riod beginning July 1. The annuity starting date is July1. This is the date you use in figuring the cost of thecontract and selecting the appropriate number from thetable for line 3 of the Simplified Method Worksheet.

Foreign employment contributions. If you workedabroad, your investment in the contract (cost) includesamounts contributed by your employer that were notincludible in your gross income. This applies to contri-butions that were made either:

1) Before 1963 by your employer for that work,

2) After 1962 by your employer for that work if youperformed the services under a plan that existedon March 12, 1962, or

3) After December 1996 by your employer on yourbehalf if you performed the services of a foreign

missionary (either a duly ordained, commissioned,or licensed minister of a church or a lay person).

Fully Taxable PaymentsThe pension or annuity payments that you receive arefully taxable if you have no investment in the contract(cost) because:

1) You did not pay anything or are not considered tohave paid anything for your pension or annuity,

2) Your employer did not withhold contributions fromyour salary, or

3) You got back all of your contributions tax free inprior years (however, see Exclusion not limited tocostunder Partly Taxable Payments, later).

Report the total amount you got on line 16b, Form1040, or line 11b, Form 1040A. You should make noentry on line 16a, Form 1040, or line 11a, Form 1040A.

Deductible voluntary employee contributions.

Distributions you receive that are based on your accu-mulated deductible voluntary employee contributionsare generally fully taxable in the year distributed to you.Accumulated deductible voluntary employee contribu-tions include net earnings on the contributions. If dis-tributed as part of a lump sum, they do not qualify forthe 5- or 10-year tax option or capital gain treatment.

Partly Taxable PaymentsIf you contributed to your pension or annuity plan, youcan exclude part of each annuity payment from incomeas a recovery of your cost. This tax-free part of thepayment is figured when your annuity starts and re-

mains the same each year, even if the amount of thepayment changes. The rest of each payment is taxable.You figure the tax-free part of the payment using one

of the following methods.

Simplified Method. You generally must use thismethod if your annuity is paid under a qualified plan(a qualified employee plan, a qualified employeeannuity, or a tax-sheltered annuity plan or contract).You cannot use this method if your annuity is paidunder a nonqualified plan.

General Rule. You must use this method if yourannuity is paid under a nonqualified plan. You gen-erally cannot use this method if your annuity is paidunder a qualified plan.

You determine which method to use when you firstbegin receiving your annuity, and you continue using iteach year that you recover part of your cost.

Qualified plan annuity starting before November 19,1996. If your annuity is paid under a qualified plan andyour annuity starting date (defined earlier under In-vestment in the Contract (Cost)) is after July 1, 1986,and before November 19, 1996, you could have chosento use either the Simplified Method or the General Rule.If your annuity starting date is before July 2, 1986, you

use the General Rule unless your annuity qualified forthe Three-Year Rule. If you used the Three-Year Rule(which was repealed for annuities starting after July 1,1986), your annuity payments are now fully taxable.

Changing the method. If your annuity starting dateis after July 1, 1986, and before November 19, 1996,you may be able to change the method you use fromthe General Rule to the Simplified Method, or from theSimplified Method to the General Rule. To do this, youmust file an amended return (showing the change) foreach tax year in which you received an annuity pay-ment. Generally, you must make this change before thelater of the following dates.

Page 9


10/40

3 years after the due date of your return for the yearin which you received your first annuity payment.For example, this date is April 17, 2000, if you re-ceived your first annuity payment in 1996.

2 years after the date that you paid the tax for thatyear.

Because of this time limit, you generally cannotchangeyour method if you received your first annuity paymentbefore 1996.

Exclusion LimitYour annuity starting date determines the total amountof annuity income that you can exclude from incomeover the years.

Exclusion limited to cost. If your annuity starting dateis after 1986, the total amount of annuity income thatyou can exclude over the years as a recovery of thecost cannot exceed your total cost. Any unrecoveredcost at your (or the last annuitant's) death is allowedas a miscellaneous itemized deduction on the final re-turn of the decedent. This deduction is not subject to

the 2%-of-adjusted-gross-income limit.

Example 1. Your annuity starting date is after 1986,and you exclude $100 a month under the SimplifiedMethod. The total cost of your annuity is $12,000. Yourexclusion ends when you have recovered your cost taxfree, that is, after 10 years (120 months). Thereafter,your annuity payments are fully taxable.

Example 2. The facts are the same as in Example1, except you die (with no surviving annuitant) after theeighth year of retirement. You have recovered tax freeonly $9,600 (8 $1,200) of your cost. An itemized de-duction for your unrecovered cost of $2,400 ($12,000minus $9,600) can be taken on your final return.

Exclusion not limited to cost. If your annuity startingdate is before 1987, you can continue to take yourmonthly exclusion for as long as you receive your an-nuity. If you chose a joint and survivor annuity, yoursurvivor can continue to take the survivor's exclusionfigured as of the annuity starting date. The total exclu-sion may be more than your cost.

Simplified MethodUnder the Simplified Method, you figure the tax-freepart of each annuity payment by dividing your cost bythe total number of anticipated monthly payments. For

an annuity that is payable for the lives of the annuitants,this number is based on the annuitants' ages on theannuity starting date and is determined from a table.For any other annuity, this number is the number ofmonthly annuity payments under the contract.

Who must use the Simplified Method. You must usethe Simplified Method if your annuity starting date isafter November 18, 1996, and you meet both of thefollowing conditions.

1) You receive your pension or annuity payments fromany of the following qualified plans.

a) A qualified employee plan.

b) A qualified employee annuity.

c) A tax-sheltered annuity (TSA) plan or contract.

2) On your annuity starting date, at least one of thefollowing conditions applies to you.

a) You are under age 75.

b) You are entitled to fewer than 5 years of guar-

anteed payments.

Guaranteed payments. Your annuity contract pro-vides guaranteed payments if a minimum number ofpayments or a minimum amount (for example, theamount of your investment) is payable even if you andany survivor annuitant do not live to receive the mini-mum. If the minimum amount is less than the totalamount of the payments you are to receive, barringdeath, during the first 5 years after payments begin(figured by ignoring any payment increases), you areentitled to fewer than 5 years of guaranteed payments.

Annuity starting before November 19, 1996. Ifyour annuity starting date is after July 1, 1986, and

before November 19, 1996, and you chose to use theSimplified Method, you must continue to use it eachyear that you recover part of your cost. You could havechosen to use the Simplified Method if your annuity ispayable for your life (or the lives of you and your sur-vivor annuitant) and you met both of the conditionslisted earlier for annuities starting after November 18,1996.

Who cannot use the Simplified Method. You cannotuse the Simplified Method if you receive your pensionor annuity from a nonqualified plan or otherwise do notmeet the conditions described in the preceding dis-cussion. See General Rule, later.

How to use it. Complete the worksheet in the backof this publication to figure your taxable annuity for1999. Be sure to keep the completed worksheet; it willhelp you figure your taxable annuity next year.

To complete line 3 of the worksheet, you must de-termine the total number of expected monthly paymentsfor your annuity. How you do this depends on whetherthe annuity is for a single life, multiple lives, or a fixedperiod. For this purpose, treat an annuity that is payableover the life of an annuitant as payable for thatannuitant's life even if the annuity has a fixed periodfeature or also provides a temporary annuity payableto the annuitant's child under age 25.

TIPYou do not need to complete line 3 of theworksheet or make the computation on line 4 ifyou received annuity payments last year and

used last year's worksheet to figure your taxable an-nuity. Instead, enter the amount from line 4 of last year'sworksheet on line 4 of this year's worksheet.

Single life annuity. If your annuity is payable foryour life alone, use Table 1 at the bottom of the work-sheet to determine the total number of expectedmonthly payments. Enter on line 3 the number shown

Page 10


11/40

for your age on your annuity starting date. This numberwill differ depending on whether your annuity startingdate is before November 19, 1996, or after November18, 1996.

Multiple lives annuity. If your annuity is payable forthe lives of more than one annuitant, use Table 2 at thebottom of the worksheet to determine the total numberof expected monthly payments. Enter on line 3 thenumber shown for the annuitants' combined ages onthe annuity starting date. For an annuity payable to you

as the primary annuitant and to more than one survivorannuitant, combine your age and the age of theyoungest survivor annuitant. For an annuity that hasno primary annuitant and is payable to you and othersas survivor annuitants, combine the ages of the oldestand youngest annuitants. Do not treat as a survivorannuitant anyone whose entitlement to payments de-pends on an event other than the primary annuitant'sdeath.

However, if your annuity starting date is before1998, do not use Table 2 and do not combine theannuitants' ages. Instead, you must use Table 1 at thebottom of the worksheet and enter on line 3 the numbershown for the primary annuitant's age on the annuity

starting date. This number will differ depending onwhether your annuity starting date is before November19, 1996, or after November 18, 1996.

Fixed period annuity. If your annuity does not de-pend on anyone's life expectancy, the total number ofexpected monthly payments to enter on line 3 of theworksheet is the number of monthly annuity paymentsunder the contract.

Example 1. Bill Kirkland, age 65, began receivingretirement benefits in 1999 under a joint and survivorannuity. Bill's annuity starting date is January 1, 1999.The benefits are to be paid for the joint lives of Bill andhis wife, Kathy, age 65. Bill had contributed $31,000 toa qualified plan and had received no distributions beforethe annuity starting date. Bill is to receive a retirementbenefit of $1,200 a month, and Kathy is to receive amonthly survivor benefit of $600 upon Bill's death.

Bill must use the Simplified Method to figure histaxable annuity because his payments are from aqualified plan and he is under age 75. Because hisannuity is payable over the lives of more than oneannuitant, he uses his and Kathy's combined ages andTable 2 at the bottom of the worksheet in completingline 3 of the worksheet. His completed worksheet fol-lows.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

Enter the total pension or annuitypayments received this year. Also, addthis amount to the total for Form 1040,line 16a, or Form 1040A, line 11a

Enter your cost in the plan (contract)at annuity starting date

Divide line 2 by line 3

Multiply line 4 by the number ofmonths for which this years paymentswere made. If your annuity startingdate was before 1987, enter thisamount on line 8 below and skiplines 6, 7, 10, and 11. Otherwise, goto line 6

Enter any amounts previouslyrecovered tax free in years after 1986

Subtract line 6 from line 2

Enter the lesser of line 5 or line 7

Taxable amount for year. Subtractline 8 from line 1. Enter the result, butnot less than zero. Also add thisamount to the total for Form 1040, line16b, or Form 1040A, line 11b

Add lines 6 and 8

Balance of cost to be recovered.Subtract line 10 from line 2

$

$

$

Enter the appropriate number fromTable 1 below. But if your annuitystarting date was after 1997 and thepayments are for your life and that ofyour beneficiary, enter the appropriatenumber from Table 2 below

Simplified Method Worksheet(Keep for Your Records)

14,40 0

31,00 0

310

100

1,20 0

-0 -

31,00 0

1,20 0

13,200

1,20 0

29,800

Note: If your annuity starting date wasbefore this yearand you completedthis worksheet last year, skip line 3 andenter the amount from line 4 of lastyears worksheet on line 4 below.Otherwise, go to line 3.

If the age at annuity

starting date was. . .

before November 19, 1996,

enter on line 3

after November 18, 1996,

enter on line 355 or under56606165667071 or older

300260240170120

360310260210160

Table 1 for Line 3 Above

AND your annuity starting date was

Table 2 for Line 3 AboveCombined ages at annuity starting date Enter on line 3

110 and under111120121130131140141 and over

410360310260210

Note: If your Form 1099-R shows alarger taxable amount, use the amounton line 9 instead.

Page 11


12/40

Bill's tax-free monthly amount is $100 ($31,000 310as shown on line 4 of the worksheet). Upon Bill's death,if Bill has not recovered the full $31,000 investment,Kathy will also exclude $100 from her $600 monthlypayment. The full amount of any annuity payments re-ceived after 310 payments are paid must be includedin gross income.

If Bill and Kathy die before 310 payments are made,a miscellaneous itemized deduction will be allowed forthe unrecovered cost on the final income tax return of

the last to die. This deduction is not subject to the2%-of-adjusted-gross-income limit.

Example 2. Bridget Fisher, age 65, began receivingretirement benefits under a joint and survivor annuity.Bridget's annuity starting date is December 1, 1997.The benefits are to be paid for the joint lives of Bridgetand her husband, Patrick, age 65. Bridget had contrib-uted $26,000 to a qualified plan and had received nodistributions before the annuity starting date. Bridgetreceives a retirement benefit of $1,000 a month, andPatrick is to receive a monthly survivor benefit of $500upon Bridget's death.

Bridget uses the Simplified Method because her an-

nuity starting date is after November 18, 1996, and thepayments are from a qualified plan. In completing line4 of the worksheet, she can use the amount from line4 of her 1998 worksheet, $100. (She had originally fig-ured that amount on her 1997 worksheet by entering260 (the appropriate number shown in Table 1) on line3 and dividing her cost on line 2 by that number.) Hercompleted worksheet follows.

12,000

26,000

100

1,20 0

1,30 0

24,700

1,20 0

10 ,80 0

2,500

23,500

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

Enter the total pension or annuitypayments received this year. Also, addthis amount to the total for Form 1040,line 16a, or Form 1040A, line 11a

Enter your cost in the plan (contract)at annuity starting date

Divide line 2 by line 3

Multiply line 4 by the number ofmonths for which this years paymentswere made. If your annuity startingdate was before 1987, enter thisamount on line 8 below and skiplines 6, 7, 10, and 11. Otherwise, goto line 6

Enter any amounts previouslyrecovered tax free in years after 1986

Subtract line 6 from line 2

Enter the lesser of line 5 or line 7

Taxable amount for year. Subtractline 8 from line 1. Enter the result, butnot less than zero. Also add thisamount to the total for Form 1040, line16b, or Form 1040A, line 11b

Add lines 6 and 8

Balance of cost to be recovered.Subtract line 10 from line 2

$

$

$

Enter the appropriate number fromTable 1 below. But if your annuitystarting date was after 1997 and thepayments are for your life and that ofyour beneficiary, enter the appropriatenumber from Table 2 below

Simplified Method Worksheet(Keep for Your Records)

Note: If your annuity starting date wasbefore this yearand you completedthis worksheet last year, skip line 3 andenter the amount from line 4 of lastyears worksheet on line 4 below.Otherwise, go to line 3.

If the age at annuity

starting date was. . .

before November 19, 1996,

enter on line 3

after November 18, 1996,

enter on line 355 or under56606165667071 or older

300260240170120

360310260210160

Table 1 for Line 3 Above

AND your annuity starting date was

Table 2 for Line 3 AboveCombined ages at annuity starting date Enter on line 3

110 and under111120121130131140141 and over

410360310260210

Note: If your Form 1099-R shows alarger taxable amount, use the amounton line 9 instead.

Page 12


13/40

Multiple annuitants. If you and one or more otherannuitants receive payments at the same time, youexclude from each annuity payment a pro-rata shareof the monthly tax-free amount. Figure your share inthe following steps.

1) Complete your worksheet through line 4 to figurethe monthly tax-free amount.

2) Divide the amount of the your monthly payment by

the total amount of the monthly payments to allannuitants.

3) Multiply the amount on line 4 of your worksheet bythe amount figured in (2) above. The result is yourshare of the monthly tax-free amount.

Replace the amount on line 4 of the worksheet withthe result in (3) above. Enter that amount on line 4 ofyour worksheet each year.

General RuleUnder the General Rule, you determine the tax-free part

of each annuity payment based on the ratio of the costof the contract to the total expected return. Expectedreturn is the total amount you and other eligibleannuitants can expect to receive under the contract.To figure it, you must use life expectancy (actuarial)tables prescribed by the IRS.

Who must use the General Rule. You must use theGeneral Rule if you receive pension or annuity pay-ments from:

1) A nonqualified plan (such as a private annuity, apurchased commercial annuity, or a nonqualifiedemployee plan), or

2) A qualified plan if you are age 75 or older on yourannuity starting date and your annuity payments areguaranteed for at least 5 years.

Annuity starting before November 19, 1996. Ifyour annuity starting date is after July 1, 1986, andbefore November 19, 1996, you had to use the GeneralRule for either circumstance described above. You alsohad to use it for any fixed period annuity. If you did nothave to use the General Rule, you could have chosento use it. If your annuity starting date is before July 2,1986, you had to use the General Rule unless youcould use the Three-Year Rule.

If you had to use the General Rule (or chose to useit), you must continue to use it each year that you re-cover your cost.

Who cannot use the General Rule. You cannot usethe General Rule if you receive your pension or annuityfrom a qualified plan and none of the circumstancesdescribed in the preceding discussions apply to you.See Simplified Rule, earlier.

More information. For complete information on usingthe General Rule, including the actuarial tables youneed, see Publication 939.

Disability RetirementIf you retired on disability, you must report your disa-bility income as ordinary income. However, you maybe entitled to a credit. See Credit for Elderly or Disa-bled, later.

Disability Payments

If you retired on disability, pension payments you re-ceive are taxable as wages until you reach minimumretirement age. Beginning on the day after you reachminimum retirement age, your payments are treated asa pension or annuity. At that time you begin to recoverthe cost of the annuity under the rules discussed earlier.

Minimum retirement age. Minimum retirement age isthe age at which you could first receive an annuity wereyou not disabled.

How to report. You must report all your taxable disa-bility payments on line 7, Form 1040 or Form 1040A,until you reach minimum retirement age.

Credit for Elderly or DisabledYou can take the credit for the elderly or the disabledif:

1) You are a qualified individual, and

2) Your income does not exceed certain limits.

You are a qualified individual for this credit if you area U.S. citizen or resident and, at the end of the tax year,you are:

1) Age 65 or older, or

2) Under age 65, retired on permanent and total dis-ability, and:

a) Received taxable disability income, and

b) Did not reach mandatory retirement age beforethe beginning of the tax year.

After January 1, 1977, you are retired on permanentand total disability if:

1) You were permanently and totally disabled whenyou retired, and

2) You retired on disability before the close of the tax

year.

Mandatory retirement age. Mandatory retirement ageis the age set by your employer at which you must re-tire.

Permanently and totally disabled. You are perma-nently and totally disabled if you cannot engage in anysubstantial gainful activity because of your physical ormental condition. A physician must certify that thecondition can be expected to result in death or that thecondition has lasted (or can be expected to last) for acontinuous period of at least 12 months.

Page 13


14/40

Substantial gainful activity. Substantial gainful ac-tivity is the performance of significant duties over areasonable period of time while working for pay or profit,or in work generally done for pay or profit.

Physician's statement. If you are under 65, youmust have your physician complete a statement certi-fying that you were permanently and totally disabledon the date you retired. You can use the Physician'sStatement in the instructions for Part II of eitherSchedule R (Form 1040) or Schedule 3 (Form 1040A).

Keep this statement for your records. You do not haveto file it with your income tax return.

TIPYou do not have to get another physician'sstatement for 1999 if certain exceptions applyand you checked the box on line 2 of Part II of

either Schedule R (Form 1040) or Schedule 3 (Form1040A).

Figuring the credit. The IRS can figure the credit foryou. See the instructions for Form 1040 or Form 1040A.

More information. For complete information on thiscredit, get Publication 524.

Taxation ofNonperiodic PaymentsThis section of the publication explains how any non-periodic distributions you receive under a pension orannuity plan are taxed. Nonperiodic distributions arealso known as amounts not received as an annuity.They include all payments other than periodic pay-ments.

For example, the following items are treated asnonperiodic distributions.

Cash withdrawals.

Distributions of current earnings (dividends) on yourinvestment. However, do not include these distri-butions in your income to the extent the insurerkeeps them to pay premiums or other considerationfor the contract.

Certain loans. See Loans Treated as Distributions,later.

The value of annuity contracts transferred withoutfull and adequate consideration. See Transfers ofAnnuity Contracts, later.

How you figure the taxable amount of a nonperiodicdistribution depends on whether it is made before theannuity starting date or on or after the annuity startingdate. If it is made before the annuity starting date, itstax treatment also depends on whether it is made undera qualified or nonqualified plan and, if it is made undera nonqualified plan, whether it fully discharges thecontract or is allocable to an investment you made be-fore August 14, 1982.

TIPYou may be able to roll over the taxable amountof a nonperiodic distribution from a qualifiedretirement plan into another qualified retirement

plan or an IRA tax free. See Rollovers, later. If youcannot use the tax-free rollover rules and the distribu-tion qualifies as a lump-sum distribution, you may beable to elect an optional method of figuring the tax onthe taxable amount. SeeLump-Sum Distributions, later.

Annuity starting date. The annuity starting date is ei-

ther the first day of the first period for which you receivean annuity payment under the contract or the date onwhich the obligation under the contract becomes fixed,whichever is later.

Distributions of employer securities. If you receivea distribution of employer securities from a qualifiedretirement plan, you may be able to defer the tax on thenet unrealized appreciation (NUA) in the securities.The NUA is the increase in the securities' value whilethey were in the trust. This tax deferral applies to dis-tributions of the employer corporation's stocks, bonds,registered debentures, and debentures with interestcoupons attached.

If the distribution is a lump-sum distribution, tax isdeferred on all of the NUA unless you choose to includeit in your income for the year of the distribution. (If youmake that choice, see Lump-Sum Distributions, later.)If the distribution is not a lump-sum distribution, tax isdeferred only on the NUA resulting from employeecontributions other than deductible voluntary employeecontributions.

The NUA on which tax is deferred should be shownin box 6 of the Form 1099R you receive from the payerof the distribution.

When you sell or exchange employer securities withtax-deferred NUA, any gain is long-term capital gainup to the amount of the NUA. Any gain that is more thanthe NUA is long-term or short-term gain, depending onhow long you held the securities after the distribution.

How to report. Enter the total amount of a nonperiodicdistribution on line 16a of Form 1040 or line 11a ofForm 1040A. Enter the taxable amount of the distribu-tion on line 16b of Form 1040 or line 11b of Form1040A. However, if you use the rules for tax-freerollovers or elect an optional method of figuring the taxon a lump-sum distribution, see How to report in thediscussions of those tax treatments, later.

Distribution On or AfterAnnuity Starting DateIf you receive a nonperiodic payment from your annuitycontract on or after the annuity starting date, yougenerally must include all of the payment in gross in-come. For example, a cost-of-living increase in yourpension after the annuity starting date is an amount notreceived as an annuity and, as such, is fully taxable.

Reduction in subsequent payments. If the annuitypayments you receive are reduced because you re-ceived the nonperiodic distribution, you can excludepart of the nonperiodic distribution from gross income.

Page 14


15/40

The part you can exclude is equal to your cost in thecontract reduced by any tax-free amounts you previ-ously received under the contract, multiplied by a frac-tion. The numerator (top part of the fraction) is the re-duction in each annuity payment because of thenonperiodic distribution. The denominator (bottom partof the fraction) is the full unreduced amount of eachannuity payment originally provided for.

Single-sum in connection with the start of annuity

payments. If you receive a single-sum payment on orafter your annuity starting date in connection with thestart of annuity payments for which you must use theSimplified Method, treat the single-sum payment as ifit were received beforeyour annuity starting date. (SeeSimplified Method under Taxation of Periodic Pay-ments, earlier, for information on its required use.) Fol-low the rules in the next discussion, Distribution BeforeAnnuity Starting Date From a Qualified Plan.

Distribution in full discharge of contract. You mayreceive an amount on or after the annuity starting datethat fully satisfies the payer's obligation under the con-

tract. The amount may be a refund of what you paid forthe contract or for the complete surrender, redemption,or maturity of the contract. Include the amount in grossincome only to the extent that it exceeds the remainingcost of the contract.

Distribution Before Annuity Starting DateFrom a Qualified PlanIf you receive a nonperiodic distribution beforethe an-nuity starting date from a qualified retirement plan,you generally can allocate only part of it to the cost ofthe contract. You exclude from your gross income thepart that you allocate to the cost. You include the re-mainder in your gross income.

For this purpose, a qualified retirement plan includesa:

1) Qualified employee plan (or annuity contract pur-chased by such a plan),

2) Qualified employee annuity plan,

3) Tax-sheltered annuity plan, and

4) Individual retirement arrangement (IRA).

Use the following formula to figure the tax-freeamount of the distribution.

Amount received Cost of contract

Account balance = Tax-free amount

For this purpose, your account balance includes onlyamounts to which you have a nonforfeitable right (aright that cannot be taken away).

Under a defined contribution plan, your contributions(and income allocable to them) may be treated as aseparate contract for figuring the taxable part of anydistribution. A defined contribution plan is a plan inwhich you have an individual account. Your benefits arebased only on the amount contributed to the accountand the income, expenses, etc., allocated to the ac-count.

Example. Before she had a right to an annuity, AnnBlake received $50,000 from her retirement plan. Shehad $10,000 invested (cost) in the plan, and her ac-count balance was $100,000. She can exclude $5,000of the $50,000 distribution, figured as follows:

$50,000 $10,000

$100,000= $5,000

Plans that permitted withdrawal of employee con-

tributions. If you contributed before 1987 to a pensionplan that, as of May 5, 1986, permitted you to withdrawyour contributions before your separation from service,any distribution before your annuity starting date is taxfree to the extent that it, when added to earlier distri-butions received after 1986, does not exceed your costas of December 31, 1986. Apply the allocation de-scribed in the preceding discussion only to any excessdistribution.

Distribution Before Annuity Starting DateFrom a Nonqualified PlanIf you receive a nonperiodic distribution before the an-

nuity starting date from a plan other than a qualifiedretirement plan, it is allocated first to earnings (the tax-able part) and then to the cost of the contract (the tax-free part). This allocation rule applies, for example, toa commercial annuity contract you bought directly fromthe issuer. You include in your gross income the smallerof:

1) The nonperiodic distribution, or

2) The amount by which:

a) The cash value of the contract (figured withoutconsidering any surrender charge) immediatelybefore you receive the distribution exceeds

b) Your investment in the contract at that time.

Example. You bought an annuity from an insurancecompany. Before the annuity starting date under yourannuity contract, you received a $7,000 distribution. Atthe time of the distribution, the annuity had a cash valueof $16,000 and your investment in the contract was$10,000. Because the distribution is allocated first toearnings, you must include $6,000 ($16,000 $10,000)in your gross income. The remaining $1,000 is a tax-free return of part of your investment.

Exception to allocation rule. Certain nonperiodic dis-

tributions received before the annuity starting date arenot subject to the allocation rule discussed above. Ifyou receive any of the distributions described below,include the amount of the payment in gross income onlyto the extent that it exceeds the cost of the contract.

The exception applies to the following distributions.

1) In full discharge of a contract that you receiveas a refund of what you paid for the contract or forthe complete surrender, redemption, or maturity ofthe contract.

2) From life insurance or endowment contracts(other than modified endowment contracts, as de-

Page 15


16/40

fined in Internal Revenue Code section 7702A) thatare not received as an annuity under the contracts.

3) Under contracts entered into before August 14,1982, to the extent that they are allocable to yourinvestment before August 14, 1982.

If you purchased an annuity contract and made invest-ments both before August 14, 1982, and after August13, 1982, the distributed amounts are allocated to your

investment or to earnings in the following order.1) The part of your investment (tax-free to you) that

was made before August 14, 1982.

2) The earnings (taxable to you) on the part of yourinvestment that was made before August 14, 1982.

3) The earnings (taxable to you) on the part of yourinvestment that was made after August 13, 1982.

4) The part of your investment (tax-free to you) thatwas made after August 13, 1982.

Distribution of U.S. Savings Bonds. If you receive

U.S. savings bonds in a taxable distribution from a re-tirement plan, report the value of the bonds at the timeof distribution as income. The value of the bonds in-cludes accrued interest. When you cash the bonds,your Form 1099-INT will show the total interest accrued,including the part you reported when the bonds weredistributed to you. For information on how to adjust yourinterest income for U.S. savings bond interest you pre-viously reported, see How to Report Interest Income inchapter 1 of Publication 550, Investment Income andExpenses.

Limits on Exclusion for Elective

DeferralsIf the contributions made for you during the year tocertain retirement plans exceed certain limits, the ex-cess is taxable to you. To correct an excess, your planmay distribute it to you (along with any income earnedon the excess) and report the distribution on Form1099-R. However, the distribution is not treated as anonperiodic distribution from the plan. It is not subjectto the allocation rules explained in the preceding dis-cussion, it cannot be rolled over into another plan, andit is not subject to the additional tax on early distribu-tions.

The following discussions explain some of the limitson elective deferrals and other contributions to retire-

ment plans and how you treat an excess on your in-come tax return.

The following discussions explain some of the limitson elective deferrals and other contributions to retire-ment plans and how you treat an excess on your in-come tax return.

Elective deferrals defined. If you are covered bycertain kinds of retirement plans, you can choose tohave part of your compensation contributed by youremployer to a retirement fund, rather than have it paidto you. These amounts are called elective deferrals,because you choose (elect) to set aside the money, and

you defer the tax on the money until it is distributed toyou.

Elective deferrals include elective employer con-tributions to cash or deferred arrangements (known assection 401(k) plans) and elective contributions toSIMPLE plans, section 501(c)(18)(D) plans, salary re-duction simplified employee pension (SARSEP) plans(see note below), and tax-sheltered annuities. However,an employer contribution to a tax-sheltered annuity isnot treated as an elective deferral if it is made under a

one-time irrevocable election by you as soon as youbecome eligible to participate in the agreement.

TIPAlthough an employer is no longer allowed toestablish a Salary Reduction Simplified Em-ployee Pension (SARSEP) plan, participants

(including new employees) in a SARSEP that was es-tablished before 1997 may continue to contribute to theplan.

Because these contributions (elective deferrals) areconsidered to be made by your employer, you are taxedon any payments you receive from the retirement fundunless you roll over the payments. See Rollovers, later.If a payment from the fund meets the requirements ofa lump-sum distribution, it may qualify for the 5- or10-year tax option. This is also discussed later.

Limits on elective deferrals. For 1999, generally, youmay not defer more than a total of $10,000 for allqualified plans by which you are covered. (This limitapplies without regard to community property laws.)The amount you can defer each year may be furtherlimited if you are a highly compensated employee. Theamount deferred by highly compensated employees asa percentage of pay can be no more than 125% of theaverage deferral percentage (ADP) of all eligible non-

highly compensated employees. Your employer or planadministrator can probably tell you the amount of thedeferral limit under this ADP test and whether it appliesto you. If you deferred more than $10,000 (or a lowerlimit under the ADP test), you must include the excessin your gross income for 1999.

Special limit for deferrals under section 457plans. If you are a participant in a section 457 plan(discussed earlier in the General Information section),you can generally set aside no more than 1/3 of yourincludible compensation, up to $8,000 in 1999. Yourplan may also allow a special catch-up limit of up to$15,000 for each of your last 3 years of service beforereaching normal retirement age. Amounts you defer

under other elective deferrals may affect your limitsunder section 457 plans. Amounts you defer undersection 457 plans may affect the amount you can deferin tax-sheltered annuities under the special limit dis-cussed next.

Special limit for tax-sheltered annuities. If youare covered by only one plan and that plan is a tax-sheltered annuity, you may defer up to $10,000 eachyear. If you are covered by several different plans andat least one of the plans is a tax-sheltered annuity, thenthe basic limit ($10,000 for 1999) for all deferrals doesnot increase by the amount deferred in the tax-sheltered annuity that year. This $10,000 limit stays the

Page 16


17/40

same even if you are covered by more than one tax-sheltered annuity.

However, if you have completed at least 15 yearsof service with an educational organization, hospital,home health service agency, health and welfare serviceagency, church, or convention or association ofchurches (or associated organization), the $10,000 an-nual limit increases. This increased limit for any year is$10,000 plus the leastof the following amounts:

1) $3,000,

2) $15,000, reduced by elective deferrals over$10,000 you were allowed in earlier years becauseof this years-of-service rule, or

3) $5,000 times the number of your years of servicefor the organization, minus the total elective defer-rals under the plan for earlier years.

Reporting by employer. Your employer must reportyour elective deferrals for the year on your Form W-2,Wage and Tax Statement. Your employer should markthe Deferred compensation checkbox in box 15 and

show the total amount deferred in box 13.Section 501(c)(18)(D) contributions. Wages shown

on your Form W-2 should not have been reduced forcontributions you made to a section 501(c)(18)(D) re-tirement plan. The amount you contributed should beidentified with code H in box 13 of your W-2 form. Youmay deduct the amount deferred subject to the limitsthat apply. Include your deduction in the total on line32 (Form 1040). Enter the amount and 501(c)(18)(D)on the dotted line next to line 32.

Treatment of excess deferrals. If the total you deferis more than the limit for the year, you must include the

excess in your gross income for the year. If the planpermits, you can receive the excess amount. Althoughyour employer must report on your Form W-2 the totalamount of your elective deferrals, you (not the em-ployer) are responsible for monitoring the total you de-fer to ensure that the deferral limit is not exceeded. Asexplained below, you must notify the plan if you exceedthe limit on elective deferrals.

If you participate in only one plan and it permits thesedistributions, you must notify the plan by the date re-quired by the plan that your deferrals exceeded themaximum amount allowed. If you participate in morethan one plan, you can have the excess paid out of anyof the plans that permit these distributions. You must

notify each plan by the date required by that plan of theamount to be paid from that particular plan. The planmust then pay you the amount of the excess, along withany income earned on that amount, by April 15 of thefollowing year (April 17, 2000, for 1999).

TIPFor any due date that falls on a Saturday,Sunday, or legal holiday, the due date is ex-tended to the next business day, as shown

above.

If you take out the excess in the year following thedeferral, do not again include it in your gross income.

Any incomeon the excess taken out is taxable in thetax year in which you take it out.

If you take out part of the excess deferral and theincome on it, allocate the distribution proportionatelybetween the excess deferral and the income.

If you do not take out the excess amount, youcannot include it in the cost of the contract even thoughyou included it in your gross income. Therefore, youare taxed twice on the excess deferral left in theplanonce when you contribute it, and again when you

receive it as a distribution.

How to report a corrective distribution of an excessdeferral. Although you must report excess deferralsand any income on that amount on your return aswages, your employer does not include them as wageson the Form W-2 you receive. File Form 1040 to addthe excess deferral amount and any income on thatamount to your wages on line 7. Do not use Form1040A or Form 1040EZ to report corrective distributionsof excess deferral amounts.

If you received a distribution in 1999 of a 1999 ex-cess deferral, you should receive a 1999 Form 1099-R

with the code 8 in box 7. Report the excess deferralon your 1999 income tax return.

If a corrective distribution was made by April 15,1999, for an excess deferral made in 1998, you shouldreceive a 1999 Form 1099-R with the code P in box7. If the distribution was for 1997, the code D shouldbe in box 7. If you did not report the excess deferralon your return for the earlier year, you must file anamended return on Form 1040X.

If you received the distribution in 1999 of incomeearned on an excess deferral, you should receive a1999 Form 1099-R with a code 8 in box 7. Report iton your 1999 income tax return regardless of when theexcess deferral was made.

Report a loss on a corrective distribution of anexcess deferral in the year the excess amount (reducedby the loss) is distributed to you. Include the loss as anegative amount on line 21 (Form 1040) and label itLoss on Excess Deferral Distribution.

Excess annual additions. The amount that can becontributed annually to a defined contribution plan isgenerally limited to the lesser of 25% of your compen-sation or $30,000. Under certain circumstances, con-tributions that exceed these limits (excess annual ad-ditions) may be corrected by a distribution of yourelective deferrals or a return of your after-tax contribu-

tions and earnings from these contributions.A corrective payment of excess annual additions

consisting of elective deferrals or earnings from yourafter-tax contributions is fully taxable in the year paid.A corrective payment consisting of your after-tax con-tributions is not taxable.

If you received a corrective payment of excess an-nual additions, you should receive a separate Form1099-R for the year of the payment with the code Ein box 7. Report the total payment shown in box 1 ofForm 1099-R on line 16a of Form 1040. Report thetaxable amount shown in box 2a of Form 1099-R on line16b of Form 1040.

Page 17


18/40

Loans Treated as DistributionsIf you borrow money from your retirement plan, youmust treat the loan as a nonperiodic distribution fromthe plan unless it qualifies for the exception explainedbelow. This treatment also applies to any loan under acontract purchased under your retirement plan, and tothe value of any part of your interest in the plan orcontract that you pledge or assign (or agree to pledgeor assign). It applies to loans from both qualified and

nonqualified plans, including commercial annuity con-tracts you purchase directly from the issuer. Further, itapplies if you renegotiate, extend, renew, or revise aloan that qualified for the exception below if the alteredloan does not qualify. In that situation, you must treatthe outstanding balance of the loan as a distribution onthe date of the transaction.

You determine how much of the loan is taxable usingthe allocation rules for nonperiodic distributions dis-cussed earlier. The taxable part may be subject to theadditional tax on early distributions. It is not an eligiblerollover distribution and does not qualify for the 5 or10year tax option.

Exception for qualified plan, TSA plan, and gov-ernment plan loans. At least part of certain loansunder a qualified employee plan, qualified employeeannuity, tax-sheltered annuity (TSA) plan, or govern-ment plan is not treated as a distribution from the plan.This exception applies only to a loan that either:

Is used to buy your main home, or

Must be repaid within 5 years.

To qualify for this exception, the loan must requiresubstantially level payments at least quarterly over thelife of the loan.

If a loan qualifies for this exception, you must treatit as a nonperiodic distribution only to the extent that theloan, when added to

Documents

US Internal Revenue Service: p575--1999