A foreign pension or annuity distribution is a payment from a pension plan or retirement annuity received from a source outside the United States.
The lump sum contribution to a foreign retirement fund may not be deducted on the US tax return. However - that after tax contribution will constitute the basis in the plan and will reduce taxable plan of future benefits.
Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract). Income received from foreign pensions or annuities may be fully or partly taxable, even if you do not receive a Form 1099 or other similar document reporting the amount of the income.
What does this mean?"However - that after tax contribution will constitute the basis in the plan and will reduce taxable plan of future benefits."
Please consider the example - your spouse will pay $10,000 into her retirement plan - that means her basis in this retirement plan will be $10,000. When she will start receiving pension benefits - $10,000 of these benefits will be not taxable.
What does this mean?"Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract)."
If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid. This amount is your cost in the plan or investment, and includes the amounts your employer contributed that were taxable to you when contributed. Generally she will use the Simplified Method to figure the tax-free part of the payments by completing the Simplified Method Worksheet in the Form 1040 Instructions
For instance - your total benefits are $1000, but taxable part is $900.
I corrected the link for you - http://www.irs.gov/pub/irs-pdf/i1040.pdf - it is pointed directly to the IRS website.
See Simplified Method Worksheet on the page 27.
Let me know if you need any help.