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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10099
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I will retire from my job at 60yr I HAVE BEEN WITH CHICAGO

Customer Question

I will retire from my job at 60yr I HAVE BEEN WITH CHICAGO TRANSIT AUTH. FOR 36YRS. THE PENSION PLAN IS AN LIFE TIME ANNUITY.IF I LEAVE NOW I WOULD RECEIVE $52,762. A YEAR $4396 A MONTH. THE COMPANY CONTRIBUTION 20.25% I CONTRIBUTE 10.125% EACH PAY CHECK. WHAT WOULD BE TAXED AND AT WHAT RATE IN ILLINOIS
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

...

For almost all annuities beginning on or after November 19, 1996, in this system, the amount excludable from federal income tax is based on the Simplified Method of reporting.

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A portion of each annuity payment is excludable from income until the full cost has been recovered.

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That portion of the payment that IS taxable is simply added to the household's other income... and that total income will dictate the rate at which it's taxed.... Becasue the annuity WILL come on top of any other income already there for the year, (the portion that's taxable) will be taxed at your highest marginal rate.

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Under this method, the recovery of the “Cost” (previously taxed contributions) is spread out over a number of years based on the combined ages of the Participant and spouse at retirement. ... So, again a portion of the payment is tax free return of principal ... and a portion is added to your other taxable income... and only your TOTAL income can show you the rate at which that last dollar will be taxed.

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The amount of each annuity check to be excluded is determined by dividing the previously taxed contributions by a factor from a table provided by the Internal Revenue Service. This ratio is typically referred to as the exclusion ratio.

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To approximate how much OF that payment will be taxable, take your life expectancy (joint life expectancy, if married). Lets say 18 years, for example.... then take the total annuity payments (52762 x 18) = 949,716 ... Next take what's referred to as your initial investment (after tax dollars you contributed into the annuity ... lets say that was 250,000) ... and calculate the exclusion ratio by dividing the nontaxable "initial investment" by the total annuity ... 250,000 / 949716 = 0.2632 ... meaning that 26.3% of each payment is a return of non-taxable investment.

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So, given this example ... 74% of that payment would be added to your taxable income.

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Hope this helps

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Lane

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Expert:  Lane replied 1 year ago.
Hi,
I’m just checking back in to see how things are going.
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Thanks
Lane
Expert:  Lane replied 1 year ago.
Hi,
….
I'm just checking back in one more time to see if you saw my answer.
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Let me know…
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Lane
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