Montgomery County sentinel. [volume] (Rockville, Md.) 1855-1974, 1957-04-11
(Continued from Page 4)


tirement pay of military person
mel, if retired on disability result
ing from active service.
On the other hand, payments
received by a retired employee
from pension plan provided by
his employer, without cost to the
employee, are fully taxable.
If you purchased an annuity
contract, if you retired under a
plan financed jointly by you and
your employer, or if you were
taxed on the contributions of
your employer under retirement
plan financed by him, part of the
payments received by you will be
taxed and the balance will be tax
free.
If you contributed to the pen
sion fund, or if you were taxed
on your EMPLOYERS contributions
to the fund and you will receive
the amount you contributed or
were taxed on within three years
AFTER retirement the rule is
simple; you report nothing as in
come until you recover your con-
tribution; after that, all amounts
received are fully taxable. Incl
dentally. this special rule usually
applies to persons retiring under
the United States Civil Service
Retirement Plan.
In all other cases. A PART OF
each annuity or pension payment
is tax-free and the balance is tax
able. The computation of the tax
able portion is based on a for
mula designed to enable the tax
payer to recover his cost tax-free.
An annual exclusion ratio is de-
terrnined by dividing your total
investment in the annuity con-
tract Cor your total contributions
to a retirement fund.- by the
TOTAL you may expect to re-
ceive. This exclusion ratio is then
applied to the amount received
during the year. These two exam
ules will illustrate the rule:
Assume you paid $500 for an
annuity contract which will pay
you $1,000 per year for ten years,
Starting in 1856. Your investment
of $500 divided by your total
expected return of $4,000 40 X
$1,000 equals rs per cent. The
$1,000 received in 1856 multiplied
by Is per cent equals $3.50. The
$3.50 is considered return of
your investment and is excluded
from taxable income. The balance
of $3.50 is fully taxable, and the
same holds true for each succeed
ing years payment.
Now assume that you retired
from your job at age 65 and will
receive an annual pension OF
$1,000 for the rest of your life
The multiple from the official In
ternal Revenue Service Actuarial
Table I for a male. age 65. is Is
years. Thus, the total you may
expect to receive is Is times $4,000
or $4,000. Now assume that YOU
contributed $4,000 to YOUR retire
ment fund while working. Your
exclusion ratio is determined by
dividing your$12,000 contribution
bv the total expected return OF
$4,000. This ratio is 40 per cent.
Thus. 40 per cent Of each years
$1,000 pension. or $500 IS taX-free
and the balance Of $1,000 is tax
able. The same ratio Of 40 per
cent will apply TO all SUBSEQUENT
wears. even though you should
live longer than the Is years
shown in the actuarial table. This
is. Of course, an example of a
simple case.
Special actuarial tables are pro
vided in other cases involving
Joint and survivor annuities and
pensions. These tables will be fur
nished by your local Internal Rev
enue Service office to those who
need them.
Mr.. Fox advised taxpayers who
have questions concerning pen
sion, annuity payments, interest.
ard ca~rYlnp charges or anv 9th
er matter on their Federal income
tax returns for 1855 to teleDnone
the local Office of the I7ter7'al
Revenue Service, Sterling 3-S400.
AS for Income Tax Information