If you made after-tax contributions to your pension or annuity plan, you can exclude part of your pension or annuity payments from your income. You must figure this tax-free part when the payments first begin. The tax-free amount remains the same each year, even if the amount of the payment changes.

You must use the Simplified Method if either of the following applies.

1. Your annuity starting date was after July 1, 1986, and you used this method last year to figure the taxable part.
2. Your annuity starting date was after November 18, 1996, and both of the following apply.
   1. The payments are from a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity.
   2. On your annuity starting date, either you were under age 75 or the number of years of guaranteed payments was fewer than 5. See IRS Publication 575 Pension and Annuity Income for the definition of guaranteed payments.

If you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax-free part of the payments. A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan. Under the Simplified Method, you figure the taxable and tax-free parts of your annuity payments by completing the Simplified Method Worksheet. You will need to complete the worksheet in the program each year that you file your return.

Determining the taxable portion of an annuity requires that you determine the amount of your contributions that have been recovered in all prior years so that your exclusion does not exceed your contributions. This has to be recomputed each year.