What Is a Statement of Annuity Paid?

An annuity provides a stream of payments, and understanding its tax implications is a concern for recipients. Each year, the financial institution or insurance company that pays your annuity sends a “Statement of Annuity Paid.” This statement summarizes all payments you received during a tax year. Its primary function is to provide the necessary information to report your annuity income correctly on your federal and state tax returns, detailing how much of your income may be subject to tax.

Decoding the Statement’s Key Information

The official name for this document is Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans. Anyone who receives a distribution of $10 or more from an annuity will get this form from the payer. Understanding the specific boxes on this form is the first step to correctly reporting your income.

The form contains several pieces of information that require your attention.

• Box 1, “Gross distribution,” shows the total amount of money you received from the annuity throughout the year before any deductions for taxes or other expenses.
• Box 2a, “Taxable amount,” indicates the portion of your gross distribution that is subject to federal income tax. This amount can sometimes be less than the gross distribution.
• Box 4, “Federal income tax withheld,” shows the total amount of federal income tax that was already withheld from your annuity payments and sent to the IRS on your behalf.
• Box 5, “Employee contributions,” details the portion of your distribution that comes from your own after-tax contributions to the plan. This amount is not taxable as it represents a return of your own money.
• Box 7, “Distribution code,” provides the IRS with more context about your distribution. A code ‘7’ signifies a normal distribution, while a code ‘1’ might indicate an early distribution subject to an additional 10% tax. These codes help determine if special tax rules apply.

Understanding the Taxable Amount

The difference between the taxable amount in Box 2a and the gross distribution in Box 1 is rooted in how annuities are taxed. For non-qualified annuities funded with after-tax dollars, payments are divided into two parts: a tax-free return of your original investment (principal) and taxable income from investment earnings.

This division is calculated using an “exclusion ratio.” The ratio determines what percentage of each payment is a return of your non-taxable principal and what percentage is taxable earnings. This non-taxable portion is excluded from your gross income, which is why the taxable amount on your Form 1099-R is lower than the total distribution.

The information in Box 5, showing your after-tax contributions, is a component in this calculation as it represents your investment in the contract. The payer uses IRS methods, like the Simplified Method, to calculate the tax-free portion of each payment over the expected life of the annuity. This ensures that you do not pay taxes on the money you already paid tax on before contributing it.

For qualified annuities, which are funded with pre-tax dollars such as in a traditional IRA or 401(k), the situation is different. Since you never paid tax on the initial contributions, the entire distribution is considered taxable income. In these cases, the amounts in Box 1 and Box 2a will be the same.

Using the Statement for Tax Filing

You will use the information on your Form 1099-R to complete your annual tax return, Form 1040. The figures from the statement are transferred to your tax return to report your retirement income. This process ensures you accurately report your earnings and any taxes already paid.

The gross distribution from Box 1 is reported on the line for “Pensions and annuities” on Form 1040. The taxable amount from Box 2a is entered on the corresponding line for taxable amounts. If the payer could not determine the taxable amount and Box 2b is checked, you may need to calculate the taxable portion yourself using IRS worksheets found in the Form 1040 instructions.

Federal income tax withheld, as shown in Box 4, is also transferred to your Form 1040. This amount is added to your other tax payments for the year, such as withholding from a job, and is credited toward your total tax liability.

You should attach a copy of your Form 1099-R to your tax return only if federal income tax was withheld from your distribution, as indicated in Box 4. Even if you are not required to attach the form, you must still report the income on your return. The payer also reports the information to the IRS, and their systems will match the data to what you report.