Simplified Method for 1099-R: Tables, Example, and Form 1040 Entry

If your Form 1099-R shows pension or annuity payments and you made after-tax contributions to the plan, the Simplified Method is how you split each payment into a tax-free piece and a taxable piece. You divide your total after-tax contributions by a number from an IRS life expectancy table, and the result is a fixed monthly amount you get to exclude from income until your contributions are fully recovered. Everything above that exclusion is taxable and goes on Line 5b of Form 1040.

When the Simplified Method Applies

The calculation is mandatory for annuity payments from qualified employee plans, qualified employee annuities, and 403(b) tax-sheltered annuities when your annuity starting date fell after November 18, 1996, and on that date you were either under age 75 or the plan guaranteed payments for fewer than five years.¹

It does not apply to IRA distributions, to commercial annuities you bought from an insurance company, or to qualified plan payments where you were 75 or older on the starting date with five or more years of guaranteed payments. Those situations use the General Rule or their own separate procedures.¹

The Four Numbers You Need

Before you open the worksheet, pull these together:

Your cost basis, meaning the total after-tax contributions you made to the plan. This is the money that was already taxed and that you’re now recovering tax-free.
Your annuity starting date, the first day of the first period for which you received a payment as an annuity. This date is fixed and determines which table you use.²
Your age on the starting date if the annuity is single-life, or the combined ages of you and your beneficiary if it’s a joint-and-survivor annuity.
The gross distribution for the tax year, from Box 1 of your Form 1099-R.³

If Box 9b Is Blank

Plan administrators aren’t required to complete Box 9b (Total Employee Contributions), and many leave it empty.³ Start with the notice your administrator sent when payments began, which usually lists total after-tax contributions. Old annual benefit statements, W-2s reflecting after-tax retirement contributions, and prior-year 1099-Rs can help reconstruct the figure. If you still can’t find it, call the plan administrator and ask for your total employee contributions directly. Publication 575 has additional guidance for incomplete records.¹

The IRS Divisor Tables

Which table you use depends on whether the annuity covers one life or two.

Table 1: Single-Life Annuity

Use this when the pension pays over your life only, with no survivor benefit. For annuity starting dates after November 18, 1996:¹

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

Table 2: Joint-and-Survivor Annuity

Add both ages as of the annuity starting date and look up the combined total:¹

Combined age 110 or under: 410
111–120: 360
121–130: 310
131–140: 260
141 or older: 210

The divisor locks in on your annuity starting date and never changes. Cost-of-living increases to your monthly payment don’t affect it.

Running the Numbers

The IRS Simplified Method Worksheet in Publication 575 and the Form 1040 instructions walks through three steps.¹

First, divide your cost basis by the number from the applicable table. The result is your monthly tax-free exclusion, the fixed amount you can pull out of each payment for the life of the annuity.

Second, multiply that monthly exclusion by the number of monthly payments you actually received during the tax year. Usually that’s 12, but use the real count if the annuity started mid-year.

Third, subtract the annual exclusion from the gross distribution in Box 1. What’s left is your taxable pension income.

An Example

Say you retired at 62 with $31,200 in after-tax contributions and receive a single-life annuity of $1,500 per month, with an annuity starting date after November 18, 1996.

Divisor from Table 1 for age 61–65: 260
Monthly exclusion: $31,200 ÷ 260 = $120
Annual exclusion for a full year: $120 × 12 = $1,440
Total payments received: $1,500 × 12 = $18,000
Taxable amount: $18,000 − $1,440 = $16,560

Box 1 shows $18,000. You report $18,000 on Line 5a and $16,560 on Line 5b. The $120 monthly exclusion stays the same every year until you’ve recovered the full $31,200, which takes 260 payments, about 21 years and 8 months.

When the Exclusion Runs Out

The tax-free portion isn’t unlimited. Once your cumulative excluded amounts equal your original cost basis, every dollar of every payment after that is fully taxable. In the example above, after 260 monthly payments the entire $31,200 has been recovered, and from then on the full $1,500 per month is taxable.¹

If you die before recovering all of your basis, the unrecovered amount is allowed as an itemized deduction on your final return. It isn’t subject to the 2% of AGI limit, and the Tax Cuts and Jobs Act’s suspension of miscellaneous itemized deductions doesn’t touch it because it sits in a different statutory category. It’s claimed on Schedule A of the final return.¹

If a Survivor Takes Over

When a retiree dies and a surviving spouse or beneficiary picks up the annuity, that survivor keeps the same monthly exclusion the retiree was using. The number doesn’t reset. The survivor continues excluding that fixed monthly amount until the combined payments (the retiree’s plus the survivor’s) hit the original divisor count, at which point every remaining payment is fully taxable. If the survivor also dies before basis is fully recovered, the remainder can be claimed as an itemized deduction on the survivor’s final return.⁴

Entering It on Form 1040

Pension and annuity income goes on Line 5 of Form 1040 or 1040-SR. Put the Box 1 gross distribution on Line 5a and the taxable amount you calculated on Line 5b. Write “SMT” next to Line 5b so the IRS sees you used the Simplified Method rather than the General Rule.

If you get partially taxable payments from more than one plan, run a separate worksheet for each one and combine the taxable amounts into a single Line 5b figure.

Fixing a Prior Year You Got Wrong

Two mistakes are common: reporting the whole distribution as taxable because you didn’t realize you had a cost basis, and using the wrong divisor so the exclusion is off. Either can be corrected by filing Form 1040-X.

To claim a refund, you generally have to file within three years of the original filing date or two years after paying the tax, whichever is later. If you filed early, the three-year window runs from the April deadline. You can file up to three amended returns for the same tax year.⁵

If you underreported and the IRS finds it first, you face interest on the unpaid tax plus a possible accuracy-related penalty of 20% of the underpayment when negligence or disregard of the rules is involved.⁶ Amending on your own before the IRS contacts you avoids the penalty risk.

1
Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
2
Legal Information Institute (LII). 26 USC 417(f)(2)(A) – Definition: Annuity Starting Date
3
Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
4
Internal Revenue Service. Tax Guide to U.S. Civil Service Retirement Benefits (Pub 721)
5
Internal Revenue Service. File an Amended Return
6
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments