How to Calculate Tax on Pension Income: Brackets and Withholding

To calculate the tax on pension income, first separate any portion that represents a return of your own after-tax contributions from the portion that’s taxable, then add the taxable portion to your other income and apply the federal ordinary income tax brackets. Most pension money is fully taxable; the only tax-free slice is what you already paid tax on during your working years.

Separate the Taxable Portion From Your Own Contributions

The IRS calls the after-tax money you put into the plan your “investment in the contract.” If your employer funded the whole plan and you never contributed after-tax dollars, every dollar of your pension is taxable and you can skip ahead to the bracket math.¹

If you did contribute after-tax dollars, the IRS lets you exclude part of each payment from income until you’ve recovered that full investment. After that point, every payment is fully taxable.² There are two ways to figure the excluded portion: the Simplified Method or the General Rule.

Use the Simplified Method for Most Employer Plans

If your payments come from a qualified employer plan such as a 401(k), traditional pension, or 403(b), and they started after November 18, 1996, you’re required to use the Simplified Method.²

Divide your total after-tax investment by a fixed number of expected monthly payments tied to your age when payments began. That produces a monthly amount that stays tax-free for the life of the recovery period. The age table from IRS Publication 575:²

Age 55 or under: 360 payments
Age 56–60: 310 payments
Age 61–65: 260 payments
Age 66–70: 210 payments
Age 71 or older: 160 payments

A worked example. You contributed $31,000 in after-tax dollars and payments start at age 58. Divide $31,000 by 310 and you get a $100 monthly exclusion. Each payment then has $100 that’s tax-free and the rest counted as ordinary income. Once you’ve received 310 payments, the $31,000 is fully recovered, and every payment after that is fully taxable.²

When the General Rule Applies Instead

The General Rule is required for nonqualified plans, such as a commercial annuity you purchased or a nonqualified employer plan. It also applies if your annuity started before November 19, 1996, and you didn’t elect the Simplified Method, or if you were 75 or older at the start date with payments guaranteed for at least five years.³

Under this method you calculate an exclusion percentage from actuarial life-expectancy tables in IRS Publication 939. Divide your investment in the contract by the expected total return over your lifetime, and apply the resulting percentage to each payment. If the ratio is 12%, then 12% of each check is tax-free and 88% is taxable, until you’ve recovered the full investment.³

Apply the 2026 Federal Tax Brackets

Pension income is taxed as ordinary income, not at capital gains rates. The taxable portion is added to your wages, Social Security (see below), and other income, and then run through the same progressive brackets used for salaries. For tax year 2026:⁴

10%: up to $12,400 (single) / $24,800 (married filing jointly)
12%: $12,401–$50,400 single / $24,801–$100,800 joint
22%: $50,401–$105,700 single / $100,801–$211,400 joint
24%: $105,701–$201,775 single / $211,401–$403,550 joint
32%: $201,776–$256,225 single / $403,551–$512,450 joint
35%: $256,226–$640,600 single / $512,451–$768,700 joint
37%: over $640,600 single / over $768,700 joint

These are marginal rates. A single retiree with $60,000 in taxable income doesn’t pay 22% across the board. The first $12,400 is taxed at 10%, the amount from there up to $50,400 at 12%, and only the sliver above $50,400 at 22%.

Subtract the Standard Deduction Before You Run the Brackets

The standard deduction comes off your income before any bracket applies. For 2026 the base amounts are $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.⁴ Taxpayers 65 and older also qualify for the traditional additional standard deduction on top of that base.

Starting in 2026, a new $6,000 senior deduction is available for taxpayers 65 and older, created by the One, Big, Beautiful Bill. It has eligibility requirements and income-based phase-outs, so not every retiree gets the full amount.⁵

A simplified illustration. You’re single, age 67, and receive $36,000 a year in pension income with no after-tax contributions, so the full $36,000 is taxable. If your combined standard and senior-related deductions total roughly $24,000, your taxable income drops to about $12,000, which sits entirely in the 10% bracket and produces around $1,200 of federal tax.

The Credit for the Elderly or Disabled can lower the bill further, ranging from $3,750 to $7,500 depending on filing status, with income limits that phase it out quickly.⁶ A credit reduces the tax you owe dollar for dollar, not just your taxable income.

Account for the Effect on Your Social Security

Pension income counts toward the formula that determines how much of your Social Security is taxable. The IRS calls it “combined income”: adjusted gross income (which includes your pension) plus tax-exempt interest plus half your Social Security benefits.⁷

Combined income above $25,000 (single) or $32,000 (joint) makes up to 50% of your Social Security taxable. Past $34,000 (single) or $44,000 (joint), up to 85% is taxable. Those thresholds haven’t moved with inflation since 1993, so most retirees drawing both a pension and Social Security see at least part of the benefit taxed.⁷ Calculate the two together; looking at pension income alone can understate what you’ll owe.

Lump Sums and Rollovers

If your plan offers a lump-sum payout and you take it in cash, the entire taxable amount lands on one year’s return, which can push you into a much higher bracket than monthly payments would.

Rolling the distribution into a traditional IRA or another qualified plan keeps it tax-deferred. A direct rollover, moved plan-to-plan, avoids any withholding and preserves the full balance.⁸ If the plan cuts a check to you instead, it must withhold 20% for federal tax, even if you plan to complete the rollover yourself.⁹

With an indirect rollover you have 60 days to redeposit the funds. To roll over the full amount, you’ll need to make up that withheld 20% from other savings; otherwise the withheld portion counts as a taxable distribution. Miss the 60-day window and the whole distribution becomes taxable, with a 10% early withdrawal penalty layered on if you’re under 59½.⁸

The Early Withdrawal Penalty

Taking pension money before age 59½ adds a 10% additional tax on top of the regular income tax.¹⁰ On a $50,000 early distribution in the 22% bracket, that’s $11,000 of regular tax plus a $5,000 penalty.

Qualified employer plans have a useful exception: if you separate from service during or after the year you turn 55, the 10% penalty doesn’t apply. Public safety employees qualify at age 50.¹⁰ This age-55 rule is specific to qualified plans like 401(k)s and traditional pensions and does not apply to IRA distributions.

Set Withholding or Pay Quarterly

Most pension administrators withhold federal income tax from each payment. You control how much by filing Form W-4P with the plan.¹¹ If you don’t file one, the payer withholds as if you were a single filer with no adjustments, which may miss your actual number in either direction.

If withholding won’t cover the bill, quarterly estimated payments may be required. The IRS generally requires them when you expect to owe at least $1,000 after withholding and credits, and your withholding won’t cover 90% of the current year’s tax or 100% of last year’s (110% if your prior-year income exceeded $150,000).¹² Due dates are April 15, June 15, September 15, and January 15 of the following year. Underpaying can trigger a penalty when you file by the April 15 deadline.¹³

Reading the 1099-R and Reporting on Form 1040

Each January, your plan sends Form 1099-R. Box 1 shows the total gross distribution; Box 2a shows the taxable amount. If the administrator can’t determine the taxable portion, Box 2a is blank and Box 2b (“Taxable amount not determined”) is checked, meaning you calculate it yourself using the Simplified Method or General Rule.¹⁴

On Form 1040 (or 1040-SR), pension income goes on Lines 5a and 5b. Partially taxable payments: total on 5a, taxable portion on 5b. Fully taxable payments: enter the amount on 5b only.¹⁵

State Tax Is a Separate Calculation

Federal tax is only part of the total. Nine states have no income tax at all, and several more specifically exempt pension income even while taxing wages, so roughly 15 states impose no tax on pension distributions, though some of those still tax 401(k) or IRA withdrawals. Among states that do tax pensions, treatments range from full taxation to age- or amount-based partial exclusions, with some giving government pensions more favorable treatment than private ones. Check your state’s department of revenue for the rules that apply to your plan type before assuming the federal number is the whole picture.

1
Internal Revenue Service. Topic No. 410, Pensions and Annuities
2
Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
3
Internal Revenue Service. Publication 939 (12/2025), General Rule for Pensions and Annuities
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
5
Internal Revenue Service. New and Enhanced Deductions for Individuals
6
Internal Revenue Service. Credit for the Elderly or the Disabled at a Glance
7
Internal Revenue Service. Social Security Income
8
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
9
Internal Revenue Service. Topic No. 412, Lump-Sum Distributions
10
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
11
Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments
12
Internal Revenue Service. Estimated Tax
13
Internal Revenue Service. When to File
14
Internal Revenue Service. Instructions for Forms 1099-R and 5498
15
Internal Revenue Service. Line Instructions for Forms 1040 and 1040-SR