On the 2025 return, line 5a shows pensions and annuities (the gross amount) and line 5b shows the taxable amount. The IRS instructions for your specific tax year control how both lines get completed.
This guide covers the calculation, Form 1099-R records, rollovers, FAFSA reporting, and what Australian-based taxpayers with U.S. filing obligations should watch for.
Key Takeaways
- Lines 5a and 5b cover pensions and annuities; IRA distributions go on lines 4a and 4b.
- The gap between the two lines may be a nontaxable portion, not a tax bill.
- A fully taxable pension goes on line 5b with line 5a left blank.
- FAFSA asks for the untaxed portion shown by the 5a minus 5b difference.
- Rollovers get separate handling outside the standard line 5 entries.
What Does Form 1040 Line 5a Minus Line 5b Mean?
Line 5a minus line 5b is the untaxed portion of a pension or annuity distribution. The 2025 Form 1040 labels line 5a "Pensions and annuities" and line 5b "Taxable amount." Line 5a generally holds the gross distribution; line 5b holds the portion included in income.
Covered payments include employer pensions, annuities, and distributions from 401(k), 403(b), and governmental 457(b) plans.
That difference may stay out of current taxable income because of after-tax basis, a qualifying rollover, or another exclusion.
What the Result Is Not
"Untaxed" does not always mean permanently tax-free. The difference is also not:
- Your tax bill or tax rate
- Your refund
- Your total income
Why FAFSA Asks for It
The 2027-28 FAFSA identifies the untaxed portion of pensions as Form 1040 line 5a minus line 5b, referencing 2025 tax information. FAFSA is measuring financial-aid resources. The IRS is calculating tax liability. Different purposes, different questions.
Caveat: If a pension is fully taxable, the IRS instructs you to enter the total on line 5b and leave line 5a blank. A blank line 5a minus line 5b gives a meaningless number, so check the instructions first.
Nearby Lines
- Lines 4a/4b: IRA distributions
- Lines 5a/5b: pensions and annuities
- Lines 6a/6b: Social Security benefits
How to Find and Calculate the Amount on Form 1040
Start with the right tax-year Form 1040 and instructions. Line descriptions, rollover rules, and FAFSA tax-year references change.
Gather Your Records
- Form 1040 and every Form 1099-R
- Rollover confirmations
- Pension or annuity statements
- Records of after-tax contributions (cost basis)
Read lines 5a and 5b exactly as shown. The cash you received may differ from the gross distribution, since withholding comes off the top.
A Hypothetical Example
This is for understanding only, not a typical outcome. Suppose line 5a shows $14,400 and line 5b shows $13,200. The subtraction gives $1,200, which may represent the portion recovered tax-free from after-tax contributions.
Reconcile with Form 1099-R
| Box | What it shows |
|---|---|
| 1 | Total (gross) distribution |
| 2a | Taxable amount reported by the payer |
| 2b | Payer could not determine the taxable amount |
| 4 | Federal tax withheld |
| 5 | After-tax investment or other nontaxable amounts |
| 7 | Distribution code(s) |
Boxes 1 and 2a are not interchangeable with lines 5a and 5b. If box 2a is blank, the 2025 instructions point you to the General Rule to figure line 5b. The 1099-R amount may also differ from your final return figure.
FAFSA may need further adjustments, such as removing a qualifying rollover. Follow the current FAFSA instructions rather than copying the whole distribution.
How Pension and Annuity Distributions Affect Taxable Income
Fully vs. Partially Taxable Payments
- Fully taxable: You made no contribution to cost, or recovered all of it tax-free before 2025. Report the box 1 total on line 5b and leave 5a blank.
- Partially taxable: Line 5a shows the box 1 gross amount. Line 5b shows only the taxable portion.
Cost Basis and Recovery Methods
After-tax contributions make part of each payment nontaxable. Two methods determine the split:
- Simplified Method: For qualified-plan payments in most cases. Divide cost by the expected number of monthly payments.
- General Rule: For nonqualified plans such as purchased commercial annuities.
The IRS example in Publication 575 uses a 65-year-old with a $31,000 investment and 310 expected monthly payments. On a $14,400 annual pension, $1,200 is tax-free and $13,200 is taxable.
For annuities starting after 1986, total tax-free recovery cannot exceed total cost.
Withholding Is Separate
Box 4 federal withholding says nothing about taxability. It does not reduce the gross distribution or change the line 5a minus 5b amount.
Where the Lines Flow
On the 2025 form:
- Line 5b feeds total income on line 9
- Line 5a does not add to income separately
- Adjusted gross income appears on line 11a (carried to 11b)
- Taxable income appears on line 15 after subtracting line 14
Common Errors
- Entering a fully taxable pension on both lines
- Treating withholding as a nontaxable amount
- Assuming every difference between the lines is a rollover
- Reporting a pension on line 4 (IRA) or line 6 (Social Security)
Rollovers, Form 1099-R, and Other Special Situations
How Rollovers Appear
A rollover can sit in the gross distribution even when little or none is currently taxable. The reporting method depends on the year:
- 2025: Check the line 5c box 1 for a rollover, including a direct rollover to another qualified plan or an IRA.
- 2024: Report the distribution on 5a, subtract eligible rollover amounts, enter the remainder on 5b, and write "Rollover" beside it. If nothing was taxable, enter zero.
Direct rollovers generally carry no mandatory withholding. An indirect rollover paid to you generally has 20% withheld and must be completed within 60 days. To roll over the full amount, you replace the withheld portion from other funds.
Reading Form 1099-R
Boxes 1, 2a, 4, 5, and 7 matter most. Code G marks a direct rollover, code 7 a normal distribution, and code 3 a disability payment. A code alone may not settle the tax treatment.
Special Cases
- Lump sums: Form 4972 may apply, and the 10-year option is limited to recipients born before January 2, 1936.
- Public safety officers: An eligible retiree may exclude the smaller of eligible premiums or $3,000.
- Disability before minimum retirement age: Report on line 1h, not lines 5a/5b.
These are fact-specific. Check the current IRS instructions or consult a tax professional.
Australian and Cross-Border Considerations
U.S. citizens and resident aliens living abroad follow the same general filing rules and owe U.S. tax on worldwide income, according to the IRS guidance for taxpayers abroad. Those in Australia may report U.S. pension or annuity income on Form 1040 the same way a filer living in the U.S. would.
Superannuation Is Not Automatically a U.S. Pension
Don't assume an Australian super fund fits lines 5a and 5b. The analysis depends on:
- The arrangement's legal structure
- Contributions and the type of distribution
- Your taxpayer status
- Treaty provisions
- Supporting documents
Article 18 of the U.S.-Australia treaty covers periodic pension payments but doesn't expressly address superannuation or lump sums. The saving clause also preserves U.S. taxation of U.S. citizens. Australian tax treatment does not decide U.S. treatment.
Practical Points
- Foreign tax credit: Form 1116 may relieve double tax, subject to limits. The Foreign Earned Income Exclusion does not apply to pension income.
- Currency: The IRS 2025 yearly average is USD 1 = AUD 1.551, so divide AUD by 1.551. Otherwise use the spot rate when income is received.
- Deadline: Qualifying taxpayers abroad get an automatic extension to June 15, but interest runs from the regular due date.
- FBAR / Form 8938: FBAR applies above $10,000 in aggregate foreign accounts. Form 8938 thresholds for taxpayers abroad start at $200,000 at year-end for single filers.
- Forms 3520/3520-A: May apply to some foreign retirement arrangements.
These are separate tests, not line 5b calculations.
VJM Global prepares U.S. Form 1040 returns and handles cross-border tax compliance for Australian-based taxpayers and other international clients. If pension or retirement income is involved, the team can review your reporting before you file.
Frequently Asked Questions
What is the IRS Form 1040 line 5a minus line 5b?
It generally means the line 5a amount less the taxable amount on line 5b. Fully taxable distributions may have no line 5a entry, so check your tax year's instructions.
What is line 21 on 1040?
On the 2025 Form 1040, line 21 is the sum of lines 19 and 20. It is not "other income," which goes on line 8. Check the form for your tax year.
Is AGI line 1 or line 11?
On the 2025 form, AGI is on line 11a (carried to 11b). Line 1 covers wages and other earned income. Verify your tax year.
What does line 15 mean on a tax return?
Line 15 is taxable income after deductions. It differs from gross pension distributions, AGI, and tax owed.
How do I report a pension rollover on Form 1040?
Compare Form 1099-R with the current instructions. Report the gross and taxable amounts, then mark the rollover: line 5c box 1 for 2025, or "Rollover" beside line 5b for 2024.
Are Form 1040 line 5a minus line 5b and taxable income the same thing?
No. The subtraction may show a nontaxable pension portion. Taxable income is calculated later, after income and deductions.
