WHAT IS IRS Publication 939
Internal Revenue Service Publication 939, General Rule for Pensions and Annuities, also called IRS Publication 939, is a document published by the IRS that provides guidance on how taxpayers are to treat income from pensions and annuities using the General Rule.
BREAKING DOWN IRS Publication 939
IRS Publication 939 explains one method for taxing pension and annuity income. The IRS breaks monthly income from pensions and annuities into two parts: a tax-free part made up of the money that was contributed by the individual, and a taxable part that represents the positive return on the investment. The General Rule, detailed in IRS Publication 939, is one of two methods used to calculate the tax-free part of a pension or annuity. The other method is the Simplified Method, which is covered in IRS Publication 575.
In 2013, the IRS began treating payments from an annuity under a nonqualified plan as net investment income. This modification means taxpayers should use Form 8960, Net Investment Income Tax – Individuals Estates and Trusts to determine their net investment income tax.
Who Should Use IRS Publication 939
Taxpayers must use the General Rule if they receive income from a nonqualified plan, or plan that does not meet Internal Revenue Code requirements to receive the tax benefits of a qualified plan. A nonqualified plan could include a nonqualified employee plan or a private or commercial annuity. The General Rule also applies to qualified plans if the annuity start date falls between July 1, 1986, and Nov. 19, 1996, and the taxpayer does not qualify for or did not choose the Simplified Method. IRS Publication 939 includes some additional scenarios in which the General Rule may apply to qualified plans. Taxpayers should use the Simplified Method instead of the General Rule if they have qualified plans including qualified employee plans, qualified employee annuities and tax-sheltered annuities or contracts.
Topics Not Covered by IRS Publication 939
IRS Publication 939 does not cover income from life insurance or individual retirement accounts, also called IRAs, and does not provide specific information on how to use the Simplified Method. IRS Publication 575, which does cover the Simplified Method, includes information on amounts received from a qualified pension or annuity plan that are not periodic, such as rollovers, lump-sum distributions that are treated as capital gains and early or excess distributions.
The IRS recommends consulting other publications for additional insight on how to treat retirement income for tax purposes. Some of the suggested IRS publications include IRS Publication 524 Credit for the Elderly or the Disabled, IRS Publication 571 Tax-Sheltered Annuity Plans (403(b) Plans) and IRS Publication 590 Individual Retirement Arrangements.