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More Information on Tax Rules
Part of the monthly benefits you receive may be a tax-free recovery of your after-tax contributions. According to IRS Publication 554, if you have a cost to recover from your pension, you can exclude part of each annuity payment from income as a recovery of your cost. If you made KPERS contributions before 1984, you have already paid taxes on those contributions. These contributions and any service purchases you made with previously-taxed money are separated because you don't have to pay income tax on them again. The rest of your benefits are taxable. The methods used to recover your cost are defined below.
Cost - Your cost is any contributions to the Retirement System on which you have already paid income tax. This includes pre-1984 contributions and service purchases you made with previously-taxed money. This amount was calculated at retirement and is shown as "IRS Net Investment" on your 1099-R. Your cost is also shown in Box 9b "Total Employee Contributions" the first year you received retirement benefits.
Three-Year Rule - Under this rule, your monthly benefits were tax-free until you fully recovered your cost. After you recovered your cost, all payments are fully taxable. This rule was repealed for anyone retiring after July 1, 1986.
Simplified Method - The tax-free part of your monthly benefits is calculated by dividing your cost by the total number of anticipated monthly payments, based on your age. If you retired after 1997 and you chose a joint-survivor option, this number is based on your age and your joint annuitant's age combined. The IRS provides tables for this calculation.
If you retired before November 19, 1996, you generally could have chosen to use the Simplified Method
If you retired November 18, 1996 or later, the Simplified Method is used to calculate the taxable and tax-free amounts of your benefit.
Note: The Simplified Method was formerly known as the Simplified General Rule.
General Rule - The tax-free part of your monthly benefits is calculated by multiplying the initial gross monthly rate by an exclusion percentage, using actuarial tables. This can be complex. For more information, see IRS Publication 939 below or consult a tax professional.
For more information, request the following publications from the Internal Revenue Service at (800) TAX-FORM.