Learning the difference between taxable and nontaxable pensions is important in order to minimize the taxes you pay

Learning the difference between taxable and nontaxable pensions is important in order to minimize the taxes you pay

Every earned income is expected to be taxable; however, there are some laws mandated in the United States (and most other countries), which make it possible for an income to be taxed in various means.  When it comes to pensions, there are some governing tax rules implemented which all depend upon the total amount of the money which is applicable for withdrawal.  The good news is pensions are divided into two main types – taxable and non-taxable. To find out what the difference is between these two, keep reading.

Taxable Pensions

You should know which income is taxable and which is not. Of course, this would give you transparency in knowing which you should be paying the tax for and which you shouldn’t.  Those taxable include those social security benefits and pensions, which are the following:

  • State pension
  • Widow’s pension
  • Bereavement allowance
  • Industrial death benefit
  • Incapacity benefit

Other than these, the occupational pension paid to you by your former employer is also included in the taxable pensions category.  However, there are some cases wherein this could be non-taxable.  Such cases only occur when you have an early retirement after an accident at work or any work-related illness, or perhaps when you have worked outside of the US in which you don’t have to pay for US tax with your current pension.

Non-taxable pensions

Non taxable pensions are great because you get to keep your entire check.  There are many  ways to minimize the taxes you pay on pensions

Non taxable pensions are great because you get to keep your entire check. There are many ways to minimize the taxes you pay on pensions

There are several pensions, which are not taxable, therefore you don’t have to worry about paying for the tax you received from your pension to the IRS. Some of these non-taxable pensions include the following:

  • Pension received from either endowment, retirement fund of the US government or a contributory annuity
  • Noncontributory pension which can be obtained from the US uniformed services like the Navy, Marine Corps, Coast Guard, Air Force and the Army
  • Pension received from working outside of the US

Some other types of pension income which are exempted from taxation include whole life insurance policy, municipal bonds, and proceeds from your residence.

If you are thinking, why you should know which pension is taxable and which is not, it is simply because it will help you avoid further issues of possible tax evasion cases if ever you happened to have a taxable pension, which you haven’t paid a tax for.  Other than that, you can be able to save a portion of your pension income in case you know if you should be paying for it or not.

You should know that taxation on your pension is not an easy task.  Therefore, you should consult the IRS to get the information you need just in case.