Is this for Social Security or a 1099-R (most other retirement plans)?
I am assuming that it is for a 1099-R, since this is a common question for the 1099-R interview.
Your "cost" in an annuity is your "basis". Please see the following for an explanation of basis in a pension or annuity.
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"Basis" in a retirement plan is also called "cost" or "contribution". In a word, it is the amount of after-tax dollars that the taxpayer contributed to the retirement plan over the years while he/she was employed.
When the taxpayer retires, then the pension or annuity from the retirement plan begins. As the payments are made to you, each payment consists of a little bit of that "basis" and a lot of the money that the company is contributing.
You don't owe tax on the "basis" that is paid to you each period, because the "basis" is after-tax dollars that you contributed - and you don't get taxed twice on the same money.
The employer's contribution is, of course, taxable. This means, for example, that if a taxpayer received $12,000 in pension payments, that perhaps only $11,600 might be taxable if $400 of the payments were the return of the "basis".
There is a Simplified Method that determines the amount of "basis" that is included in each periodic payment, so that the return of the "basis" to the taxpayer is spread out over an actuarial life span.
If the taxpayer didn't make any after-tax contributions to the retirement plan (as is often the case), then the "basis" is zero, and each distribution from the retirement plan is 100% taxable.
