When are pension or annuity payments fully taxable to a taxpayer?

Pension or annuity payments are fully taxable to a taxpayer when they have paid no cost for the pension or annuity. This is because, in scenarios where the taxpayer did not contribute any personal funds towards the pension or annuity—meaning they had no basis in the plan—the entire amount received is subject to income tax.

When a taxpayer receives payments from a pension or annuity in which they have not made any contributions, those payments are considered fully taxable income. This principle is rooted in the tax code, which specifies that any gain received after having no initial investment (or cost basis) is taxed as ordinary income.

Other factors, such as employer contributions or being under a certain age, do not influence the taxability of the payments in the same direct manner as the absence of taxpayer contributions. If an employer withheld contributions on behalf of the employee, or if prior contributions were received tax-free, these situations don't fully determine the tax implications of future payments.