If you paid for your annuity with money you already paid taxes on, after you enter your 1099-R, you will answer questions about your annuity, including your basis in the annuity. This is where you will enter the amount you put into it and that will be removed from your taxable income, but it still needs to be entered so all of the information is present for the IRS. You will still need to pay taxes on the interest as that is earnings and all earnings are taxable.