Taxability of Service Pensions

Pension income is subject to federal income tax. However, part of your pension may not be taxed based on any after-tax contributions you may have made to the Plan.

After-Tax vs. Pre-Tax

From July 1, 1982 through November 21, 1996, mandatory member contributions were made on an "after-tax" basis. This means you paid withholding taxes on your income before contributions were deducted. Because this money was taxed when contributed to the Plan, it will be tax-free when received as part of your monthly pension benefits.

For all other periods, mandatory member contributions were made on a "pre-tax" basis. This means your contributions were deducted from your paycheck before income tax withholding was calculated. These amounts are "tax-free" when you contribute them. Therefore, the pension benefits provided by these contributions are taxable when you receive them at retirement.

You may have contributed both on an after-tax and pre-tax basis. The amount of your after-tax contributions will be returned to you free of federal income taxes as you receive your pension. We will inform you of the portion of your first payment that is tax-free. The balance of each pension payment will be taxable as ordinary income in the year received. The tax-free amount of your pension will continue until you have recovered all of the after-tax dollars you contributed to the Plan. Once your contributions have been recovered, the entire amount of all future pension payments will be taxable as ordinary income.

Determining Taxability

For pensions effective on or after January 1, 1998, the formula we use to determine the amount of your benefit that is taxable vs. the amount that is tax-free, is the one developed by the IRS. (Also called the "Simplified Method.") The tax-free portion is based on the amount of your after-tax contributions at retirement, and your age (plus your spouse's/domestic partner's age, if applicable) when you begin to receive pension benefits.

The formula determines the amount of your pension that will not be taxed and the length of the time for that exclusion. (See charts below.) By subtracting the tax-free amount from your gross pension for a fixed number of months, your already-taxed contributions will be recovered. Cost-of-living pension increases will not change or have any effect on the tax-free amount since the calculation is based upon your original retirement allowance.

Simplified Method - Table II

For Retirees Who Do Not Have a Qualified Surviving Spouse/Domestic Partner

Example: Assume a single retiree at age 55 has a monthly pension of $5,300.13 and total after-tax contributions amount to $48,656.60. The tax excludable amount is $48,656.60 / 360 = $135.16

Therefore, in this example the taxable amount of the pension is indicated in the right-hand column below:

In this example, the service pension would be fully taxable after 360 months.

Simplified Method - Table III

For Retirees Who Have a Qualified Surviving Spouse/Domestic Partner

Example: Assume a 55 year-old retiree has a 54-year old Qualified Surviving Spouse/Domestic Partner, a monthly pension of $5,300.13 and total after-tax contributions amounting to $48,656.60. Using the Simplified Method - Table III, the total amount of monthly payments to recover the after-tax contribution is calculated as follows:

The combined age 55 + 54 = 109. The number of payments for the combined age of 109 is 410. $48,656.690 / 410 = $118.67

Therefore, in this example the taxable amount of the pension is indicated in the right-hand column below:

In this example, the service pension would be fully taxable after 410 months.

If you have any questions, please call the Service Pension Section at(213) 978-4575 or (800) 787-2489, ext. 84575.