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Could somebody enlighten me on the tax consequencies of Pension income. Is it treated like earned income and subject to all taxes like FICA (Social Security tax), medicare, SDI etc. I know that portion of pension income is subject to federal income tax and state income tax. I am not sure about other taxes. I'm about to retire and would like to estimate my net income which will consist of pension income and social security benefits.
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Greetings, Deesh, and welcome. You asked:

Could somebody enlighten me on the tax consequencies of Pension income. Is it treated like earned income and subject to all taxes like FICA (Social Security tax), medicare, SDI etc. I know that portion of pension income is subject to federal income tax and state income tax. I am not sure about other taxes. I'm about to retire and would like to estimate my net income which will consist of pension income and social security benefits.

Your pension income must declared for the purposes of and is subject to local, state and federal income taxes. It is NOT subject to any other taxes imposed for any other purpose.

Regards..Pixy
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Only federal, state, and local income taxes are charged on pension income, not FICA.

If you made any after-tax contributions to the pension fund, the 1099R form reporting the income from the pension for the tax year will indicate that the taxable amount is either not determined or the taxable amount (in box 2a) will be different from (lower than) the gross distribution amount in box 1. If the taxable amount is not determined, there's a table and worksheet that guides the calculation for coming up with the taxable amount.

Be aware that you need to cover the tax due on pension income either by making estimated tax payments (to state and local as well as IRS) or by asking the payer of the pension to withhold taxes, in the same way as an employer does for salary income. If you're going to pay estimated tax, you need either to come within 10% or $1,000 of the total tax bill for the year (sometimes this is very difficult to forecast!) or pay as much as the total tax bill was for the preceding year (this is called "safe harbor").

Karl (an AARP Tax-Aide counselor)
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Some states let you exclude most or all of your pension income, up to a limit, as a favor to retirees. Something to consider when you're planning your retirement.
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Hi Karl:
Thanks a lot for taking time to respond. My follow up question: Is pension income treated like earned income for social security benefits reduction? I learnt that a social security recepient between 62 & 65 can earn upto $11,500 without any reduction in SS benefits. Also can I fund IRA & Roth IRA out of pension benefits in the future.

I plan to retire sometime during next year. I'll be 62+ and intend to apply for SS as soon as I retire. Does it matter how much I will have earned before applying for SS during 2003. I plan to fund 457, 401a, Roth IRA to the max allowed before retiring out of earned income. I'll settle on retirement date after I get a clear picture how to maximize tax planing.

Any source for further reading will be appreciated.

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Is pension income treated like earned income for social security benefits reduction?

No.

Also can I fund IRA & Roth IRA out of pension benefits in the future.

Also no.

Does it matter how much I will have earned before applying for SS during 2003.

No. Only earnings after you retire can impact your social security benefits.

--Peter
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Is pension income treated like earned income for social security benefits reduction?

No.


However, it is included in AGI, which determines what percentage of SS benefits is taxable. This can be up to 85%! (Nice little tidbit a lot of folks are unaware of until tax time.)

Cheers anyway!
jtr
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