A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree’s investment. If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree’s final income tax return. For more information about the tax treatment of pensions and annuities, see Itemized deductions and review the 2017 IRS Publication 575, Pension and Annuity Income .

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