taxation of federal retirement benefits - 1105...

Taxation of Federal Retirement Benefits 2013

TaxaTion of federal reTiremenT BenefiTsBy Edward A. Zurndorfer

ABOUT THE AUTHOR

Edward A. Zurndorfer is a retiree of the federal government and is currently the owner of EZ Accounting and Financial Services, an accounting and financial service firm in Silver Spring, MD. He is a Certified Financial Planner (CFP), a Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Registered Health Underwriter (RHU) and Registered Employee Benefits Consultant (REBC). He is also an IRS Enrolled Agent, licensed to represent taxpayers before the IRS. His firm specializes in the areas of individual taxes, tax preparation and consulting, employee benefits consulting in the areas of health and life insurance and retirement planning.

Mr. Zurndorfer writes for Federal Employees News Digest (FEND). He is the author of numerous other 1105 Media Inc. publications. He has written numerous articles in national and local financial journals, including the National Public Accountant, the Maryland Society of Accountants Journal, and the National Society of Enrolled Agents Journal.

He is also the moderator of 1105’s popular FederalSoup.com question-and-answer forum. He conducts retirement and benefits seminars throughout the country for federal employees, as well as seminars on the Thrift Savings Plan, long-term care insurance, and the government’s new flexible spending accounts program.

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TaxaTion of ReTiRemenT benefiTs

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Table of Contents

Introduction ........................................................................................................................................................ 4

1. Tax Information for Retiring Employees ...................................................................................................... 5

2. Notification of Federal Retirement Income ................................................................................................... 5

3. Retirement Rules and Procedures for the Various Civil Service Retirement Systems ...................................... 6

4. General Information for Recipients of Civil Service Retirement Benefits ..................................................... 8

5. Rules for Retirees ........................................................................................................................................ 10 (For retirees who retire on nondisability retirement)

6. Simplified Method, General Rule and the Three-Year Rule ........................................................................ 11

7. Alternative Form of Annuity (AFA) Option ................................................................................................ 14

8. Thrift Savings Plan (TSP) ........................................................................................................................... 18

9. Taxation of Social Security Benefits ............................................................................................................ 22

10. Rules for Survivors of Federal Employees ................................................................................................... 27

11. Rules for Survivors of Federal Retirees ....................................................................................................... 33

12. Volunteer Contribution Program (VCP) Withdrawals ............................................................................... 35

13. Other Tax Issues .......................................................................................................................................... 40

Appendix .......................................................................................................................................................... 45


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introduction Federal employees are enrolled in one of two retirement systems. The older system, established in 1920, is called the Civil Service Retirement System (CSRS). It automatically covers all full-time and part-time employees who entered government service prior to Jan. 1, 1984.

The CSRS is classified as a defined benefit retirement system. This means that an employee who retires under the CSRS will receive a guaranteed lifetime annuity with annual cost-of-living allowances, and may designate a survivor annuitant, if a survivor annuity is chosen. Since 1988, CSRS-covered employees have also been able to voluntarily contribute to the Thrift Savings Plan (TSP). CSRS-covered employees can also voluntarily contribute to the CSRS Voluntary Contribution Program (VCP).

The other federal government retirement system is the Federal Employees Retirement System (FERS). All full- time and part-time employees entering government service after Jan. 1, 1984, have been placed in FERS. FERS is also classified as a defined benefit retirement system. While not as generous as the CSRS, FERS also assures its retirees a guaranteed income for life through the basic FERS annuity. In addition to the basic FERS annuity, FERS-covered employees are eligible for Social Security and can also contribute to the TSP. However, unlike CSRS-covered employees, FERS-covered employees receive partial government matching in the TSP.

In addition to the CSRS and FERS, the federal government also operates the CSRS Offset retirement system. This retirement system is for those CSRS-covered employees with at least five years of service prior to Jan. 1, 1987, who left government service for at least one year and were rehired on or after Jan. 1, 1984. At the time these employees returned to government service, they were given an option to either join FERS within six months of being rehired, or be placed in a special CSRS Offset system. CSRS Offset-covered employees receive a CSRS annuity and Social Security benefits, as well as TSP income if they have contributed to the TSP.

During 1987-1988 and 1998, a number of CSRS-covered employees took advantage of an open season opportunity to transfer out of the CSRS and into the FERS. When these “FERS transferees” retire from federal service, they will draw their retirement from two sources—one portion of their retirement benefits will be based on their vested years of CSRS service (based under that system’s rules) and the remaining portion of their annuity will be derived from their years of service under FERS. FERS transferees may also be eligible for Social Security retirement benefits, if they have accumulated enough quarters of coverage or credits under Social Security.

Compared to private retirement plans, the federal government has very generous retirement plans for its retirees. They are also complicated, particularly with respect to how the various retirement plans are taxed. This publication describes and explains the federal and state tax rules that apply to each of these retirement systems.


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1. Tax information for retiring employees When a federal employee retires, he or she is eligible for a lump-sum payment of all the unused annual leave the retiring employee has accumulated at the time of retirement. This payment is subject to federal and state income taxes, as well as Social Security (FICA) taxes in the case of FERS employees, and Medicare Part A (hospital insurance) payroll taxes. There are no deductions for Thrift Savings Plan (TSP) contributions, health, life and long-term care insurance premiums, or CSRS or FERS retirement contributions. This means that a retiring employee’s final paycheck is the last opportunity he or she has to contribute to the TSP.

The lump-sum payment for unused annual leave will be directly deposited into the same bank account into which the employee’s final paycheck will be direct-deposited. This usually occurs within two to six weeks after an employee has retired from federal service. The payment is taxable in the year the payment is received and not in the year or years in which the annual leave was earned. Consider the following examples:

Example 1. Renee, a CSRS-covered employee, retired on Jan. 2, 2012. She accumulated 448 hours of unused annual leave at the time of her retirement. On Jan. 20, 2012, Renee received a direct deposit for the 448 hours of annual leave hours she accumulated and did not use, as well as a direct deposit of her final paycheck. Renee does not work during 2013. In January 2013, Renee received from her agency a W-2 for 2012 showing her taxable wages that she received during January 2012, which included her last paycheck and her unused annual leave together with all of the federal and state income withholdings and Medicare Part A payroll tax that were deducted from Renee’s two payments she received in January 2012.

Example 2. Joe, a FERS-covered employee, retired on Nov. 30, 2012. Joe accumulated 200 hours of unused annual leave at the time of retirement. He received his final paycheck and lump-sum payment for unused annual leave on Friday, Dec. 16, 2012. Both payments will be included on Joe’s 2012 W-2 that Joe will receive from his agency in January 2013

2. Notification of Federal Retirement Income All pension income payments paid to federal retirees, whether they are from CSRS or from FERS, are reported following the year of receipt on Form CSA 1099-R, Statement of Annuity Paid. See the Appendix for a sample CSA 1099-R. Social Security benefit payments are reported to recipients in January on Form SSA-1099. See the Appendix for a sample SSA-1099.

Both TSP and traditional IRA distribution payments are reported to recipients on IRS Form 1099-R. See the Appendix for a sample Form 1099-R.

Note that if federal income and/or state income taxes are withheld from any federal pension annuity, Social Security, TSP or IRA payments, then the appropriate 1099 form must be attached to one’s federal income tax return (Form 1040 or 1040A), and if applicable, to one’s state income tax return.


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3. retirement rules and Procedures for the Various Civil service retirement systems

Csrs Since 2001, CSRS-covered employees have contributed 7 percent of their pay (the rate was 7.4 percent between 1999 and 2001) to the CSRS Retirement and Disability Fund. It is this fund that pays income for the life of CSRS annuitants and their survivor annuitants.

The 7 percent that is withheld from the paychecks of CSRS-covered employees is done on an after-tax basis— federal and, if the employee lives in a state with a state income tax, state income taxes. This is significant because the after-tax money will be returned to the CSRS annuitant tax-free on a monthly basis as part of the annuitant’s monthly annuity payment. This will be explained later in the discussion of the Simplified Rule.

CSRS-covered employees can retire under a normal retirement as soon as they fulfill one of the following combinations of age and service: (1) at least 55 years old with at least 30 years of service; (2) at least 60 years old with 20 years of service; or (3) at least 62 years old with five years of service.

A CSRS-covered employee can voluntarily retire only upon fulfilling the minimum age and service requirements. Under special conditions—an early retirement authorized by Congress and the Office of Personal Management (OPM), a reduction-in-force or a downsizing initiative—employees can be granted an “early out” retirement program. CSRS-covered employees who are eligible for an authorized early retirement include those who have at least 25 years of service at any age, or who are at least age 50 and have at least 20 years of service. CSRS-covered employees who are younger than age 55 at the time of an authorized agency early out retirement are subject to a permanent reduction in their CSRS annuities. This reduction is equal to one-sixth of 1 percent for each full month, or 2 percent per year, for an employee who, at the time of retirement, is 55 or younger.

fers The Federal Employees Retirement System (FERS) took effect on Jan. 1, 1984. New employees hired after Dec. 31, 1983, are covered by FERS. Other federal employees not covered by FERS had the option to transfer into FERS during one of the two FERS open seasons in 1987 and 1998.

FERS is composed of three tiers: (1) Social Security; (2) the basic FERS annuity; and (3) the Thrift Savings Plan (TSP). Employees pay Social Security taxes each year—up to a certain maximum amount of wages which changes each year. These Social Security taxes are matched by the employer and the federal government. Employees are able to contribute to the TSP, up to a dollar amount of $17,500 during 2013. Each pay period, an employee’s agency contributes to the TSP by putting an amount equal to 1 percent of an employee’s basic pay. Once an employee starts to contribute, the government partially matches the employee contributions.

Similar to CSRS-covered employees, FERS-covered employees hired before Jan. 1, 2013, have withheld a portion of their basic pay (0.8 percent) (FERS-covered employees hired after Jan. 1, 2013, have 3.1 percent of their basic pay withheld) on an after-tax basis, as their contributions to FERS, with additional contributions made by the


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federal government and the employing agency on behalf of the employee. With respect to the Social Security or Federal Insurance Contribution Act (FICA) tax, during 2012 employees had withheld 4.20 percent on the first $110,100 of their wages deducted for the FICA tax. Employee FICA tax contributions are matched by an employer, in this case by the federal government. For 2013, the FICA payroll tax reverts back to 6.2 percent for the employee, up to the maximum wage base of $113,700.

CSRS-covered and FERS-covered employees both pay the Medicare Part A hospital insurance payroll tax equal to 1.45 percent of wages earned, with matching from the federal government. Unlike the FICA tax, there is no limit as to the amount of an employee’s annual wages that is subject to the Medicare Part A hospital insurance payroll tax. Under FERS, employees who have at least 30 years of service may retire at their minimum retirement age, or MRA. The MRA depends on an employee’s year of birth, as summarized in the following chart.

Employees under FERS may also retire at age 60 with at least 20 years of service, or at age 62 with at least five years of service. There is also a special voluntary retirement feature under FERS which allows employees to retire under the “MRA + 10” option. The “plus 10” means 10 years of federal service. A FERS-covered employee, who reaches MRA with at least 10 years of service but fewer than 20 years, can leave government service and apply for an immediate basic FERS annuity. This allows the employee to retire instead of waiting until they are age 60 or 62. Such an individual will be subject to a 5 percent annuity penalty for every year—five-twelfths of 1 percent per month—the individual is under age 62 at the time of leaving federal service.

Csrs offset CSRS Offset employees are simultaneously covered by CSRS and Social Security. The eligibility rules for a normal, or voluntary, retirement under the CSRS Offset program is subject to the same general rules and procedures that govern the CSRS program (see above).

Year of Birth MRABefore 1948 age 551948 age 55 and 2 months1949 age 55 and 4 months1950 age 55 and 6 months1951 age 55 and 8 months1952 age 55 and 10 months1953 through 1964 age 561965 age 56 and 2 months1966 age 56 and 4 months1967 age 56 and 6 months1968 age 56 and 8 months1969 age 56 and 10 months1970 or after age 57


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Under the CSRS Offset rules, an employee who retires before age 62 will be eligible to receive a CSRS annuity just as if the employee were covered by CSRS. The amount of the basic annuity is reduced—or offset—by a portion of the Social Security when the retiree reaches age 62 and becomes eligible for Social Security coverage. This is based on years of federal service under CSRS Offset. In particular, the amount of the reduction will be the amount of the Social Security benefit attributed to service after 1983 that was covered by both CSRS and Social Security. A survivor annuity based on this service will be reduced for any type of other Social Security survivor benefit.

fers ‘Transferees’ During the original enrollment period held between July 1, 1987, and June 30,1988, and during a second open season transfer period conducted from July 1 through Dec. 31, 1998, CSRS-covered employees could voluntarily join FERS. Those employees who had at least five years of CSRS coverage retained their CSRS retirement benefits. These employees are called “FERS transferees.”

FERS transferees will have a blend of retirement income. They will receive a combined CSRS (based on years of service under CSRS) and FERS (based on years of service under FERS) annuity check. They will also receive benefits from Social Security and from the TSP. The eligibility rules for retirement for FERS transferees are the same as for the “pure” FERS-covered employees, even though a part of a FERS transferee’s annuity is from CSRS.

4. General information for recipients of Civil service Retirement Benefits

refund of Contributions Employees who leave government service or transfer to a job not under CSRS or FERS, and who are not eligible for an immediate annuity, can choose to receive a refund of their after-tax contributions to the CSRS and/or FERS Retirement and Disability Funds. The refund will include both regular and voluntary contributions made to the fund(s), plus any payable interest.

If the refund includes only the employee’s contributions, then none of the refund is taxable. If the refund includes interest, the interest is taxable unless it is rolled over into a retirement plan such as the TSP or to a traditional IRA. If OPM does not transfer the interest via a direct rollover, then any interest payments made to the former employee will be automatically subject to 20 percent federal income tax withholding.

Interest will not be paid on contributions to the CSRS retirement fund for service after 1956 unless the former employee worked for more than one year but less than five years. It is therefore possible that many employees covered under CSRS who leave government service will not receive interest on their refunds of contributions and will not be taxed on their refunds.


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Two other points regarding the payment of interest (rather than a direct rollover) to a qualified retirement plan or to an IRA are:

• Interest paid as part of a lump-sum refund may qualify as a lump-sum distribution, eligible for capital gain treatment or the “10-year lump-sum averaging” option.

• The capital gain treatment and 10-year lump-sum averaging are available only to individuals born before Jan. 2, 1936.

federal Tax Withholding and estimated Taxes As will be discussed shortly, most of a CSRS or FERS annuity is taxable and subject to federal income taxes. OPM will withhold federal income taxes unless told otherwise by the annuitant. These withholding rules apply to either disability or normal retirement annuities.

The choice not to withhold federal income taxes remains in effect until it is changed by the annuitant. If federal income taxes are not withheld from one’s annuity, then the annuitant may have to make estimated tax payments. An annuitant may owe a penalty if the total of withheld tax and estimated taxes does not cover at least 90 percent of the tax liability shown on the annuitant’s income tax return.

Annuitants can choose not to have federal income taxes withheld or to have tax withheld, depending on marital status and withholding allowances. OPM Form W-4P-A, Election of Federal Income Tax Withholding, is required in both cases. If no form is filed with OPM, then OPM will withhold federal income taxes as if the annuitant is married and claiming three withholding allowances.

To change the amount of federal income tax withholding, annuitants have two choices besides filing Form W-4P-A with OPM. They can: (1) call the OPM Retirement Information Office at 1-888-767-6738 (annuitants within the local Washington, D.C., area call 202-606-1800), or call Annuitant Express at 1-800-409-6528. Annuitants who have TTY/TDD equipment should call 1-800-878-5707; or (2) contact OPM via the Internet at www.servicesonline.opm.gov. Annuitants and survivor annuitants will need to have their retirement claim number (CSA or CSF), Social Security number and personal identification number (PIN).

filing requirements In general, if a retiree’s gross income, including the taxable part of the retiree’s annuity, is less than a certain amount, then the retiree does not have to file a federal income tax return for that year. The gross income filing requirements for the tax year are in the instructions to the Form 1040, 1040A or 1040EZ. The filing requirements depend on one’s filing status.

Surviving spouses of deceased federal retirees also have minimum gross income filing requirements. If the survivor annuity includes a survivor annuity benefit for one or more children, then each child’s annuity counts as his or her own income, not the surviving spouse’s survivor annuity, for federal income tax purposes.


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5. rules for retirees(For retirees who retire on nondisability retirement)

Upon retirement from federal service, an employee will receive an annuity statement from OPM showing that the annuity is approved. The annuity statement shows the commencement date (the annuity starting date), the gross monthly rate of the annuity benefit, and the employee’s total contributions, that is, the retiree’s cost in the retirement plan (CSRS or FERS). The retiree will use this cost in the plan to determine the tax-free monthly portion of the annuity.

The gross monthly rate is the amount that the annuitant will receive each month less any adjustment for electing a survivor’s annuity or for electing the lump-sum payment under the alternative annuity option, if either is applicable. The gross monthly rate does not, however, include any deduction for income tax withholding, insurance premiums, etc.

Note that the monthly annuity payment contains an amount on which the retiree had previously paid income tax—the cost basis in the plan. This amount was included in the gross income for federal and, in most cases, state income tax purposes in the years it was taken out of the retired employee’s pay. If the retiree had repaid contributions that had been withdrawn from the retirement plan earlier, or if the retiree paid into the retirement plan to receive full credit for service not subject to retirement deductions, the entire repayment (including any interest) is part of the cost.

How a retiree calculates the tax-free recovery of the cost of the CSRS or FERS annuity depends on the annuity starting date.

• If the annuity starting date is before July 2, 1986, either the Three-Year Rule or the General Rule (both discussed later) applies to the annuity.

• If the annuity starting date is after July 1, 1986, and before Nov. 19, 1996, then the retiree could have chosen to use either the General Rule or the Simplified Method (discussed later).

• If the annuity starting date is after Nov. 18, 1996, then the retiree must use the Simplified Method.Under both the General Rule and the Simplified Method, the retiree’s monthly annuity payment is made up of two parts: (1) the tax-free part that is a return of the retiree’s cost (see above) and (2) the taxable part that is the amount of each payment that is more than the retiree’s cost. The tax-free part is a fixed dollar amount. It remains the same, even when the retiree’s annuity is increased by a cost- of-living allowance (COLA).

If an employee retires without a survivor annuity and reports the annuity under the Simplified Method, then the tax-free monthly amount is not changed even if the retiree later chooses a survivor annuity. If the unmarried retiree reported the annuity under the General Rule and consequently chooses a survivor annuity, then a new exclusion percentage must be calculated.

A retiree who has elected a survivor annuity for a spouse but who subsequently divorces should notify OPM. The annuity may be increased to remove the reduction for a survivor benefit. The increased annuity does not change


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the cost recovery at the annuity starting date. The tax-free part of each annuity payment remains the same.

Finally, for annuity starting dates after 1986, the total amount of annuity income that the retiree and survivor annuitant can exclude over the years as a return of cost may not exceed the total cost. Annuity payments paid to the retiree or to the survivor annuitant after the total cost in the plan has been recovered are fully taxable.

Example. Joe, a CSRS annuitant, retired in 2012 and excludes $1,000 a month under the Simplified Method. If Joe’s cost is $120,000, the exclusion ends after 10 years (120 months) of Joe’s retirement. Thereafter, Joe’s entire CSRS annuity is taxable.

If the annuity starting date is after July 1, 1986, and the cost of the annuity has not been fully recovered at the retiree’s or the survivor annuitant’s death, then a deduction is allowed for the unrecovered cost. The deduction is claimed on the retiree’s or the survivor annuitant’s final tax return as a miscellaneous itemized deduction not subject to the 2 percent of adjusted gross income limitations.

6. Simplified Method, General Rule and the Three-Year Rule If a retiree’s annuity starting date is after Nov. 18, 1996, then the retiree must use the Simplified Method to figure the tax-free part of a CSRS or FERS annuity. Form CSA 1099-R, Statement of Annuity Paid, is issued by OPM to each retiree every January. This form shows the amount of an annuity paid in the previous year and the taxable amount of the annuity. This is done by using the Simplified Method.

Under the Simplified Method, a retiree figures the tax-free part of each full monthly payment by dividing the retiree’s cost in the annuity, the amount contributed to the CSRS or FERS retirement fund on a post-tax basis, by a number of months based on the age of the retiree at the time of retirement. If the annuity includes a survivor benefit for a spouse, then this number is based on the combined ages of the retiree and spouse at the time of retirement.

Retirees should use Worksheet 1 (see the Appendix) to figure their taxable annuity. They should keep the completed worksheet in order to figure the taxable amounts in later years.

Here is a summary of lines 1 through 3 on Worksheet 1:

• Line 1. This is the total of the gross annuity payments received during the previous year.

• Line 2. This is the cost in the plan. It is the total of the retiree’s contributions – already taxed – to the CSRS or FERS retirement plan while still a federal employee.

• Line 3. The retiree must find the appropriate number from one of the tables at the bottom of Worksheet 1 — Table 1 for an annuity without a survivor benefit, Table 2 for an annuity with a survivor benefit


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• Line 6. If an individual retired before 2011, then the amount previously received tax-free must be entered on line 6. Here is an example that illustrates the Simplified Method:

Example. Donald, a CSRS-covered employee, retired from the federal government on Nov. 30, 2011, under an annuity that would provide a survivor benefit for his wife, Kathy. His annuity starting date was Dec. 1, 2011. He must use the Simplified Method to figure the tax-free part of his annuity benefits.

Donald’s monthly benefit is $3,600 per month, or a total of $43,200 during 2012. He had contributed $52,000 to his retirement plan and had received no distributions before his annuity starting date. At his annuity starting date, he was 56 and Kathy was 54.

Donald’s completed worksheet is shown on page 13. To complete line 3, he used Table 2 at the bottom of the worksheet and found the number in the second column opposite the age range that includes 110, which is the sum of his and Kathy’s combined ages. Donald keeps a copy of the completed worksheet for his records. It will help him—and help Kathy if she survives him—to figure the taxable amount of the annuity in later years.

Donald’s tax-free monthly amount is $126.83 (see line 4 of worksheet). If he lives to collect more than 410 monthly payments, he will have to include in his gross income the full amount of any annuity payment received after 410 payments have been made.

If Donald does not live to collect 410 monthly payments and his wife begins to receive monthly payments, she will also exclude $126.83 from each monthly payment until a total of 410 payments have been collected. If she dies before 410 payments have been made, a miscellaneous itemized deduction (not subject to the 2 percent of adjusted gross income limit) will be allowed for the unrecovered cost on her income tax return.


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Worksheet 1. Simplified Method for Donald’s Annuity 1. Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a ..................................................1. $43,2002. Enter your cost in the plan at the annuity starting date plus any death benefit exclusion* ...............................................................................................................................2. $52,000Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year’s worksheet on line 4 below. Otherwise, go to line 3.3. Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 .............................................................................3. 4104. Divide line 2 by line 3 ............................................................................................................4. $126.835. Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 .................................5. $1,5226. Enter any amounts previously recovered tax-free in years after 1986 .......................................6. 07. Subtract line 6 from line 2.. ....................................................................................................7. $52,0008. Enter the smaller line 5 or line 7 ............................................................................................8. $1,5229. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1009R shows a larger amount, use the amount on this line instead. .............................................................9. $41,67810. Add lines 6 and 8 ................................................................................................................10. $1,52211. Balance of cost to be recovered. Subtract line 10 from line 2 ...........................................11. $50,478

Table 1 for line 3 above And your Annuity starting date was-If the age at before Nov. 19, 1996, after Nov. 18, 1996, annuity starting date was… enter on line 3… enter on line 3…55 or younger 300 36056-60 260 31061-65 240 26066-70 170 21071 or older 120 160

Table 2 for line 3 aboveIf the combined ages atannuity starting date were… Then enter on line 3…110 or less 410111-120 360121-130 310131-140 260141 or more 210

*A death benefit exclusion up to $5,000 is applied to certain benefits received by survivors of employees who died before Aug. 21, 1996.


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General rule If a retiree’s annuity starting date is after Nov. 18, 1996, then the General Rule cannot be used to calculate the tax-free part of the CSRS or FER annuity. If the annuity starting date is after July 1, 1986, but before Nov. 18, 1996, then either the General Rule or the Simplified Method can be used to compute the tax-free part of the annuity. For details on the General Rule, retirees should see IRS Publication 939, “General Rule for Pensions and Annuities,” available for download from the IRS Web site at www.irs.gov.

Under the General Rule, the tax-free part of each full monthly payment is determined by multiplying the initial gross monthly rate by an exclusion percentage. Figuring this percentage is complex and requires the use of actuarial tables. These tables and other information about the General Rule may be found in IRS Publication 939.

Three-Year Rule If a retiree’s annuity starting date was before July 2, 1986, then the retiree reported the annuity using the Three-Year Rule. Under this rule, the retiree excluded all the annuity payments from income until the full cost was recovered as monthly payments. After the cost was recovered, all payments become taxable. Retirees who had used the Three-Year Rule cannot use another rule to exclude amounts from income.

The Three-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986.

7. alternative form of annuity (afa) option A CSRS- or FERS-covered employee who leaves federal service with a nondisability retirement may be eligible for the alternative annuity. This annuity consists of a lump-sum credit of retirement contributions, including nonrefundable retirement contributions, civilian service credit deposits, and military service credit deposits, plus an actuarially reduced retirement annuity.

To be eligible for this choice, an employee must retire, but not on disability, and have a life-threatening illness or other critical medical condition. A physician must certify that the employee has a life-threatening condition. This certification is a written statement attached to the retirement application. The election of the AFA will not affect the value of the survivor benefit election. The election of an AFA does require the consent of the employee’s current spouse. In the case of a former spouse who is entitled by a court order to a survivor annuity or a portion of the retirement annuity, the law prohibits election of the AFA—even if the former spouse consents to the election.

The lump-sum payment received under the AFA generally has a tax-free part and a taxable part. The tax-free part represents part of the cost of the annuity. The taxable part represents part of the earnings in the annuity contract. If the lump-sum credit, discussed below, includes a deemed deposit or redeposit, then the taxable amount may be more than the lump-sum payment.

The recipient of a lump-sum payment must include the taxable part of the payment in the income in the year


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received unless it is rolled over into another qualified retirement plan or to a traditional IRA. If OPM does not transfer the taxable amount to an IRA or other plan in a direct rollover, then federal income taxes will be withheld at a 20 percent rate.

The taxable part of the lump-sum payment does not qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year lump-sum averaging treatment. It may also be subject to an additional 10 percent tax on early distributions if the employee separates from federal service before reaching age 55.

To compute the taxable part of a lump-sum payment, one should use Worksheet 2, (Lump-Sum Payment) (see the Appendix). A completed worksheet should be kept with one’s records.

To complete Worksheet 2, a recipient of a lump-sum payment under the AFA will need to know the following:

Lump-sum credit. Generally, this is the same amount as the lump-sum payment that the individual receives—the total of the individual’s contribution to the CSRS or FERS retirement systems. For purposes of the AFA, a lump-sum credit may include deemed deposits and redeposit that OPM advanced to the individual’s retirement account so that he or she is given credit for the service they represent.

Deemed Deposits. Deemed Deposits, including interest, are for federal employment during which no retirement contributions were deducted from the individual’s salary. Deemed redeposits, including interest, are for any refunds of retirement contributions received by the individual and not paid back. The individual is treated as if he or she had received a lump-sum payment equal to the amount of the lump-sum credit and then had made a repayment to OPM of the advanced amounts.

Present Value of the Annuity Contract. The present value of the individual’s annuity contract is determined using actuarial tables provided by the IRS. Individuals receiving a lump-sum payment under the AFA who wish to find out the present value of their annuity contract can contact the IRA Actuarial Group in writing at:

Internal Revenue Service Actuarial Group 2 SE:T:EP:RA:T:A2 1111 Constitution Ave., NW PE-4C3 Washington, D.C. 20224

Example. Joseph retired from federal service in 2012, when he was 55 years old. He had contributed $31,000 to his retirement plan during his career and is eligible to receive a lump-sum payment of the $31,000 under the AFA. According to IRS actuarial tables, the present value of Joseph’s annuity contract is $155,000.

The tax-free part and the taxable part of the lump-sum payments are calculated using Worksheet 2, as shown on page 16. The taxable part ($24,800) is also used to determine the taxable part of his reduced annuity payments (see worksheet).


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reduced annuity A retiree who has chosen to receive a lump-sum payment under the AFA option will receive reduced monthly annuity payments. These annuity payments will have a tax-free and a taxable part. To determine the tax-free part, the retiree must use the Simplified Method (see the Appendix, Worksheet 1).

In completing line 2 of Worksheet 1, the retiree must reduce the cost in the plan by the tax-free part of the lump-sum payment received. This comes from line 5 of Worksheet 2.

Here is a follow-up to the previous example.

Example. Same facts as in the previous example with Joseph as the retiree. In addition to his lump-sum payment of $31,000, Joseph (a single individual) received 10 annuity payments during 2012 of $1,200. Using Worksheet 1 (see page 17), Joseph calculates the taxable part of the annuity payments. Joseph completes line 2 by reducing his cost in the plan from $31,000 to $31,000 less $6,200, or $24,800. His entry on line 2 is therefore $24,800, his net cost in the plan. Joseph does not include the tax-free part of his lump-sum payment on line 6 of Worksheet 1.

Worksheet 2. Lump-Sum Payment

1. Enter your lump-sum credit (your cost in the plan at the annuity starting date) ..............................................................................................................1. $31,0002. Enter the present value of your annuity contract ....................................................................2. $155,0003. Divide line 1 by line 2 ............................................................................................................3. 0.204. Tax-free amount. Multiply line 1 by line 3 .............................................................................4. $6,200 5. Taxable amount. Subtract line 4 from line 1. Include this amount in the total on line 16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet 1 in this publication .....................................5. $24,800

Note that Joseph will report the $24,800 income received on his income tax return for the year it is received.


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Worksheet 1. Simplified Method for Joseph’s AFA lump-sum payment

1. Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a ..................................................1. $12,0002. Enter your cost in the plan at the annuity starting date plus any death benefit exclusion* ...............................................................................................................................2. $24,800Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year’s worksheet on line 4 below. Otherwise, go to line 3.3. Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 .............................................................................3. 3604. Divide line 2 by line 3 ............................................................................................................4. $68.895. Multiply line 4 by the number of months for which this year’s payments were made. IF your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6 ................................5. $688.906. Enter any amounts previously recovered tax free in years after 1986 .......................................6. 07. Subtract line 6 from line 2 ......................................................................................................7. $24,8008. Enter the smaller line 5 or line 7 .............................................................................................8. $688.909. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1009R shows a larger amount, use the amount on this line instead ..............................................................9. $11,311.1010. Add lines 6 and 8 ................................................................................................................10. $688.9011. Balance of cost to be recovered. Subtract line 10 from line 2 ..............................................11. $24,111.10

Table 1 for line 3 above And your annuity starting date was–If the age at before Nov. 19, 1996, after Nov. 18, 1996,annuity starting date was… enter on line 3… enter on line 3…55 or younger 300 36056-60 260 31061-65 240 26066-70 170 21071 or older 120 160

Table 2 for line 3 aboveIf the combined ages atannuity starting date were… Then enter on line 3…110 or less 410111-120 360121-130 310131-140 260141 or more 210*A death benefit exclusion up to $5,000 is applied to certain benefits received by survivors of employees who died before Aug. 21, 1996.


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The fers retiree annuity supplement FERS employees who retire before age 62 under the normal or regular retirement rules (at least 30 years of service and retire at MRA or later before age 62, or with at least 20 years of federal service and retire at age 60 or later before age 62) or under an “early” retirement, are eligible to receive the FERS retiree annuity supplement. This supplement is payable until the retiree becomes age 62 and is paid in addition to the FERS annuity. The supplement provides a bridge in income between a FERS annuitant’s retirement date and the date that the annuitant first becomes eligible for Social Security, which is age 62.

Because the FERS retiree annuity supplement is paid entirely by the Office of Personnel Management, it is fully taxable for federal and state income tax purposes. If a survivor (spousal) retiree annuity supplement is paid, it is also fully taxable for federal and state income tax purposes.

8. Thrift savings Plan (TsP) If TSP account owners have made traditional (non-Roth) contributions to their TSP account, they have not yet paid taxes on those contributions and the accrued earnings. They will owe taxes on those contributions (except contributions made from tax-exempt pay) and earnings when they receive a payment (distribution) from their account. They may continue deferring payment of taxes by directly transferring or directly rolling over the payment to a traditional IRA or to an eligible employer plan.

If TSP account owners have made Roth contributions to their TSP account, they have already paid taxes on those contributions. They will not owe taxes on those contributions when they receive a payment (distribution) from the account. The tax treatment of earnings depends on whether the payment is a “qualified distribution,” which means that the participant’s entire payment is distributed tax-free.

The earnings in a Roth balance become qualified, and are therefore paid tax-free, when the following two conditions have been met: (1) five years have passed since Jan. 1 of the calendar year in which the account owner made the first Roth contribution (this is referred to as the “five-year rule”); and (2) the account owner is at least 59.5 or disabled.

All of the monies distributed from a traditional TSP account are taxable in the year that the monies are paid to the account owner. Withdrawals made from the TSP are taxed as ordinary income. This is because neither the contributions nor the earnings have been included previously in the account owner’s taxable income.

Uniformed services TsP accounts A uniformed services TSP account owner who has made contributions that are from combat zone pay does not include those contributions as taxable income when they are withdrawn. However, any earnings on those contributions are subject to tax when they are distributed. The TSP will send a statement to the TSP account owner stating the total of the distributed amount and of the taxable amount of the distribution.


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TsP annuity A TSP account owner who has left or retired from federal service can purchase a TSP annuity. If the account owner has a traditional (non-Roth) balance in the TSP account, the taxes on those contributions (and the earnings) are deferred until the money is paid to the account owner. The TSP annuity payments composed of traditional (non-Roth) contributions and earnings will be taxed as ordinary income in the years when the owner receives them. If the owner has a Roth balance in the TSP account, those contributions were made with after-tax dollars. The TSP annuity payments composed of Roth contributions will not be taxed. Whether the Roth earnings portion of any annuity payment is taxed depends on whether that particular payment meets the IRS rules for qualified Roth distributions.

Note: TSP annuity payments are not subject to the IRS early withdrawal penalty, even if the TSP annuity owner is under age 55.

Cash Withdrawals Cash withdrawals from a traditional TSP account, a single payment or a series of monthly withdrawals, are taxed as ordinary income in the year they are paid out. Individuals who receive a single lump-sum payment may be able to use the 10-year lump-sum option to figure the tax due on the withdrawal. To qualify for the 10-year option, the plan participant must have been born before Jan. 2, 1936.

If a TSP account owner receives a single payment, the TSP generally must withhold 20 percent for federal income tax. This federal withholding will also occur if the TSP account owner chooses to receive the account balance in monthly payments over a period of less than 10 years. Any money paid to TSP account owners younger than age 59.5 may be subject to an additional 10 percent tax on early distributions. This additional tax does not apply in the following situations:

• The TSP account owner separates from government service during or after the calendar year he or she reaches age 55.

• The TSP account owner chooses to receive his or her account balance in monthly payments based on life expectancy.

• The TSP account owner retires on disability.

rollover rules A rollover is a tax-free withdrawal of cash or other assets from one qualified retirement plan or traditional IRA that is reinvested into another qualified retirement plan or traditional IRA. Any amount rolled over is not included in the account owner’s income. The amount rolled over is taxed later when it is withdrawn from the new account.

Effective Jan. 1, 2010, eligible TSP account owners (those who have retired from federal service or who are still federal employees, at least age 59.5, and who want to make a one-time age-based withdrawal) are allowed to take some or all of their TSP accounts and transfer it to a Roth IRA. In order to do this rollover before Jan. 1, 2010, the account owner’s modified adjusted gross income had to be less than $100,000. But effective Jan. 1, 2010, there are no restrictions—age, income or filing status—for performing a TSP rollover to a Roth IRA. Those eligible TSP account owners who request such rollovers must keep in mind that: (1) all such transfers are fully


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taxable in the year of transfer; and (2) the TSP account owner must have owned an existing Roth IRA to which the TSP funds will be rolled over.

Any amount rolled over from the TSP to a Roth IRA is subject to the same rules as for converting a traditional IRA into a Roth IRA. For more information, see “Converting From Any Traditional IRA Into a Roth IRA” in Chapter 1 of IRS Publication 590 (available for download at www.irs.gov).

A qualified retirement plan is generally: (1) a qualified employee plan; (2) a qualified employee annuity; (3) a tax- sheltered annuity plan (403(b) plan); and (4) a federal, eligible state or local government deferred compensation plan. The CSRS, FERS and TSP are examples of this type of qualified retirement plan. Employees who leave government service and receive a refund of their CSRS or FERS contributions can roll over any interest received on the contributions. The actual CSRS or FERS contribution cannot be rolled over. TSP owners can roll over any part of their TSP account balances except for:

• a distribution of the account balance that the TSP owner chooses to receive in monthly payments over: - his life expectancy, - the joint life expectancies of the account owner and a beneficiary, or - a period of 10 years or more;

• a required minimum distribution generally beginning at age 70.5;

• a declared distribution because of an unpaid loan, if the account owner has not separated from government service; or

• a hardship distribution. Visit the TSP Web site at www.tsp.gov/PDF/formspubs/tsp-70.pdf to get additional information.

Additionally, a distribution to the account owner’s beneficiary is generally not treated as an eligible rollover distribution.

A TSP account owner can choose to have the TSP transfer any part of an eligible rollover distribution directly to another qualified retirement plan that accepts rollover distributions, or to a traditional IRA. The distribution cannot be rolled over into a Roth IRA. If the direct rollover option is selected, then no federal income tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan.

If an eligible rollover distribution is paid to the TSP account owner, then the TSP must withhold 20 percent for federal income taxes even if the TSP account owner plans to roll over the distribution to another qualified retirement plan or traditional IRA. The full amount is treated as a distribution even though only 80 percent is received by the TSP account owner. The owner must include in income any part of the distribution, including the part withheld for taxes that is not rolled over to another qualified retirement plan or to a traditional IRA. Withholding from an eligible rollover distribution paid directly to an account owner is not required if the distributions for the tax year total less than $200.

A TSP account owner who leaves government service before the calendar year in which he or she reaches age 55, and who is younger than age 59.5 at the time a TSP distribution is paid, may have to pay an additional 10 percent on any part of the distribution, including any tax withheld that is not rolled over. More information on taxes on early distributions is found in IRS Publication 575, “Pension and Annuity Income.”


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A TSP participant who wants to roll over more of an eligible rollover distribution than the amount that was received after federal income taxes were withheld can add funds from another source, such as savings or borrowing amounts. Here is an example that illustrates this point.

Example. Phillip leaves federal service at age 52. On March 1, 2012, he receives an eligible rollover distribution of $50,000 from his TSP account. The TSP withholds $10,000 so that he actually receives $40,000. If Phillip wants to roll over the entire $50,000 to postpone including the amount in his income, then he will have to get $10,000 from another source and add it to the $40,000 actually received. If Phillip rolls over only $40,000, he must include in his income the $10,000 not rolled over. Also, he may be subject to the 10 percent additional tax on the $10,000.

The TSP account owner must complete the rollover of an eligible rollover distribution by the 60th day following the day in which the distribution was received. The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond the account owner’s reasonable control. Additional information on this waiver may be found in Revenue Procedure 2003-16, in Internal Revenue Bulletin 2003-4.

A surviving spouse of a deceased federal employee may be able to roll over—tax-free—all or part of the TSP distribution received. The rollover rules apply to the surviving spouse as if he or she were the employee. A distribution paid to a beneficiary other than the employee’s surviving spouse must be made to an eligible rollover distribution.

The TSP or OPM must provide a written explanation of the eligible rollover options to employees who leave or retire from federal service. This written explanation must be provided no earlier than 90 days and no later than 30 days before the distribution is made.

Effective Jan. 1, 2007, non-spousal beneficiaries may roll over all or part of inherited TSP assets to an “inherited IRA.” The previous table may help departing employees decide which distribution option to choose. The effects of each option should be compared.

Table 1. Comparison of Payment to You versus Direct RolloverAffected Item Result of a Result of a Payment to You Direct Rollover

Withholding The payer must withhold 20% of There is no withholding. the taxable part.

Additional tax If you are younger than 59.5, a 10% There is no 10% additional tax may apply to the taxable additional tax. part (including an amount equal to the tax with-held) that is not rolled over. When to report Any taxable part (including the taxable Any taxable part is not as income part of any amount withheld) not rolled income to you until later over is income to you in the year paid. distributed to you from the new plan or IRA.


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9. Taxation of Social Security Benefits Many federal employees will be eligible for Social Security retirement benefits. This includes FERS-covered and CSRS Offset employees who contribute to Social Security through payroll deduction. CSRS-covered employees do not contribute to Social Security and are therefore ineligible for Social Security based on their employment with the government. They may be entitled to Social Security benefits as a result of outside earnings, or spousal and survivor Social Security benefits.

A portion of Social Security benefits is taxed if substantial income (per a base amount for filing status) is received in addition to Social Security benefits. Form SSA-1099 (see the Appendix) is sent each January showing the amount received in the previous year. Worksheets to determine taxable Social Security are also in the Appendix.

To find out whether any of an employee’s Social Security benefits are taxable, a Social Security recipient needs to compare the base amount to his or her filing status with the total of:

(1) One-half of the Social Security benefits, plus

(2) All other income, including tax-exempt interest

The base amount is:

• $25,000 if one is single, head of household, or qualifying widow(er),

• $25,000 if one is married filing separately and lived apart from one’s spouse for all of 2012,

• $32,000 if one is married filing jointly, or

• $0 if one is married filing separately and lived with one’s spouse at any time during 2012.

If part of one’s Social Security benefits are taxable, then the amount that is taxable depends on the total amount of one’s benefits and other income. Generally, the higher that total amount, the greater the taxable part of one’s benefits.

Frequently, up to 50 percent of one’s benefits will be taxable, and up to 85 percent of one’s benefits can be tax-able if either of the following situations applies: (1) the total of one-half of the individual’s benefits and all other income is more than $34,000 ($44,000 if married filing jointly); or (2) the individual is married filing separately and lived with one’s spouse at any time during 2011.

Here is an example that illustrates the taxability of Social Security benefits.

Example. Ray and Sue file their income taxes as married, filing jointly. Ray is a retired federal employee and received a fully taxable FERS annuity of $40,000 during 2012. He also received Social Security benefits, and his Form SSA-1099 for 2012 (below) shows net benefits of $5,600 in Box 5. Sue worked during the year and had wages of $14,000. Ray and Sue have two savings accounts with a total of $2,500 in interest income. Ray and Sue complete Worksheet 3 (page 24) and find that $4,760, or 85 percent, of Ray’s Social Security retirement benefits are taxable for 2012.


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Figure 1. Ray’s SSA-1099 for 2012 Social Security Benefit Statement

2012

2012

2012

2012 2012


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Worksheet 3. Social Security/RRB* Taxability Worksheet

Name: Ray and Sue Biv SSN: 999-99-9999Filing Status: Married Filing JointlyCurrent Tax Year: 2012

1. Total Social Security and RRB benefits received .......................................................... $5,6002. 50% of SSA benefits (0.5 * line 1) ............................................................................... $2,8003. Adjusted gross income w/o SSA and RRB benefits .................................................... $56,5004. Exempt income

a. Tax exempt interest & dividends ...............................................b. Excluded Qualified U.S. Savings Bond Interest

(Form 8815) ..............................................................................c. Excluded foreign earned income or housing

(Form 2555/2555-EZ) ..............................................................d. Certain income of bona fide residents of American

Samoa (Form 4563) and Puerto Rico ........................................e. Excluded employer-provided adoption benefits

(Form 8839) ..............................................................................f. Student loan interest deducted ...................................................g. Tuition & related expenses deduction

(after 12/31/02) .........................................................................

Total: line 4 ............................. $05. Provisional income (line 2 + line 3 + line 4) .............................................................. $59,3006. Base amount 1 (Status A: $44,000, B: -0-, C: $34,000) ............................................ $44,0007. Base amount 2 (Status A: $32,000, B: -0-, C: $25,000) ............................................ $32,0008. 50% of (line 5 – line 7) (not less than -0- ) ............................................................... $27,3009. 50% of (line 6 – line 7) ............................................................................................. $12,00010. Taxable SSA and/or RRB income under 50% Rule

(smallest of line 2, line 8, or line 9) ........................................................................... $2,80011. Taxable SSA and/or RRB under 85% Rule

85% of (line 5 – line 6) (not less than -0- ) ............................................................. $15,30012. Sum of line 10 and line 11 ...................................................................................... $18,10013. 85% of SSA and/or RRB benefits (0.85 * line 1) ...................................................... $4,76014. Total taxable SSA and/or RRB income

(smaller of line 12 or line 13) ................................................................................... $4,760

* RRB is Railroad Retirement Benefits


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Name: SSN:Filing Status: C – Single, HH, QW, MFS living Apart All Year Current Tax Year: 2012

1. Total Social Security and RRB benefits received ........................................................ $2. 50% of SSA and RRB benefits (0.5 * line 1).............................................................. $3. Adjusted gross income w/o SSA and RRB benefits ................................................... $4. Exempt income a. Tax exempt interest & dividends ........................ b. Excluded qualified U.S. Savings Bond Interest (Form 8815) ....................................................... c. Excluded foreign earned income or housing (Form 2555/2555-EZ) ....................................... d. Certain income of bona fide residents of American Samoa (Form 4563) and Puerto Rico ................ e. Excluded employer-provided adoption benefits (Form 8839) ...................................................... f. Student loan interest deducted ........................... g. Tuition & related expenses deduction (after 12/31/02) .................................................

Total: line 4 ............................. $05. Provisional income (line 2 + line 3 + line 4) .............................................................. $6. Base amount 1 (Status A: $44,000, B: -0-, C: $34,000) ............................................ $34,0007. Base amount 2 (Status A: $32,000, B: -0-, C: $25,000) ............................................ $25,0008. 50% of (line 5 – line 7) (not less than -0- ) ............................................................... $9. 50% of (line 6 – line 7) ............................................................................................. $4,50010. Taxable SSA and/or RRB income under 50% Rule (smallest of line 2, line 8, or line 9) ......................................................................... $11. Taxable SSA and/or RRB under 85% Rule 85% of (line 5 – line 6) (not less than -0- ) ............................................................. $12. Sum of line 10 and line 11 ...................................................................................... $13. 85% of SSA and/or RRB benefits (0.85 * line 1) ..................................................... $14. Total taxable SSA and/or RRB income (smaller of line 12 or line 13) .................................................................................. $

*Railroad Retirement Benefits


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Social Security and the Lump-Sum Election Benefits are included in the recipient’s 2012 income in the event a Social Security recipient receives a retroactive lump-sum payment of benefits during 2011, even if the payment included in the benefits is for an earlier year. One would use the 2012 income limits to calculate the taxable part of the total benefits received during 2012. One may be able to compute the taxable portion of a lump-sum payment for an earlier year separately, using one’s income for the earlier year. This method can be elected if it lowers a person’s taxable Social Security benefits.

Information on the lump-sum method and all necessary worksheets needed to compute the taxable portion of the lump-sum benefit may be found in IRS Publication 915, “Social Security and Railroad Retirement Benefits.” Here is an example that illustrates a lump-sum or retroactive payment of benefits.

Jim retired on disability from federal service during 2012. In 2007, he applied for Social Security benefits but was told he was ineligible. He appealed the decision and won. In 2012, he received a lump-sum payment of $8,000, of which $2,000 was for 2011 and $6,000 was for 2012. Jim also received $10,000 in Social Security benefits during 2012. His total benefits during 2012 were therefore $18,000. Jim needs to use the “lump sum” method for determining how much of the total Social Security benefits of $18,000 are taxable for 2011 and how much are taxable for 2012.

Note: This type of lump-sum benefit payment should not be confused with the lump-sum death benefit, ($255, an amount that has not changed in 70 years) that the Social Security Administration pays to many beneficiaries (widows or widowers and children who are immediately eligible for death benefits based on the earnings record of the deceased). No part of the lump-sum death benefit is subject to income taxes.

Repayment of Social Security Benefits In some situations, a Social Security recipient’s Form SSA-1099 will show an entry in Box 4 entitled “benefits repaid to SSA.” A description of these repaid benefits is also shown on Form SSA-1099.

For 2012, benefits repaid represent an individual’s repayment during 2012 of benefits that were received in previous years. If an individual’s total benefits repaid (Box 4) is more than the gross benefits received (Box 3), then the net benefits (Box 5) will be a negative number—a figure in parentheses—and none of the benefits are taxable. If an individual receives more than one SSA-1099, then a negative figure in Box 5 of one form is used to offset a positive figure in Box 5 of another SSA-1099 for that same year.

Example: Jack and Jill file a joint tax return for 2012. Jack received Form SSA-1099 showing $4,000 in Box 5. Jill also received Form SSA-1099 and the amount in Box 5 was ($1,000). Jack and Jill will use $3,000 ($4,000 less $1,000) as the amount of their net benefits when figuring if any of their combined benefits are taxable.

If the repayment of benefits received in an earlier year(s) results in a net negative amount in Box 5, then the negative amount can be used as an itemized deduction on one’s federal income taxes, Schedule A, if the affected individual itemizes on his or her income taxes. Affected individuals should check IRS Publication 915, “Repayments More Than Gross Benefits,” with respect to how to claim this deduction on their federal income tax return.


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10. rules for survivors of federal employees This chapter discusses the tax rules affecting survivors of federal employees. It explains what these survivors need to know about how to treat various monies received as a result of the employee’s death. Rules for survivors of federal annuitants are discussed in Chapter 11.

employee earnings Salary or wages earned by a federal employee but paid to the employee’s survivor or beneficiary after the employee’s death is income in respect of the decedent. This income is taxable to the survivor or beneficiary. In addition, any salary or wages earned but not paid to a deceased federal employee, and any accrued annual leave paid to a survivor or beneficiary, is fully taxable.

Dependents of Public Safety Officers The Public Safety Officers’ Benefits program, administered through the Bureau of Justice Assistance, provides a tax-free death benefit to eligible survivors of public safety officers whose death is the direct and proximate result of a traumatic injury sustained in the line of duty. The death benefit is not included in the decedent’s gross estate for federal estate tax purposes, or the survivor’s gross income for federal income tax purposes.

A public safety officer is a law enforcement officer, firefighter, or member of a public rescue squad or ambulance crew. In certain circumstances, a chaplain killed in the line of duty is also a public safety officer. The chaplain must have been responding to a fire, rescue or police emergency as a member or employee of a fire or police department.

FERS Death Benefit A surviving spouse of a deceased FERS-covered employee with at least 18 months of federal service may be entitled to a special FERS death benefit. The surviving spouse can take the benefit in the form of a single payment or in the form of a special annuity, payable over a three-year period.

The tax treatment of the special death benefit depends on the benefit payment option and whether a FERS survivor annuity is also paid.

If a single payment option is chosen, the tax treatment rules are:

• If a FERS survivor annuity is not paid, at least part of the special death benefit is tax-free. The tax- free part is an amount equal to the employee’s FERS contributions.

• If a FERS survivor annuity is paid, all of the special death benefit is taxable. The surviving spouse cannot allocate any of the employee’s FERS contributions to the special death benefit.

If the surviving spouse chooses the three-year annuity option, at least part of each monthly payment is tax-free. If a FERS survivor annuity is not paid, then the tax-free part of each monthly payment is an amount equal to the


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employee’s total FERS contributions divided by 36—the number of months in three years. If a FERS survivor annuity is paid, then the deceased employee’s contributions have to be allocated between the three-year annuity and the survivor annuity. The allocation should be made in the same proportion that the expected return from each annuity bears to the total expected return from both annuities. The amount allocated to the three-year annuity should be divided by 36. The result is the tax-free part of each monthly payment of the three-year annuity.

Csrs or fers survivor annuity A survivor annuitant will also receive the employee’s cost contributions to the CSRS or FERS tax-free if the total cost had not been paid to the deceased annuitant at the time of death. The employee’s cost is the total contributions to the retirement plan (CSRS or FERS) that were deducted from the employee’s salary throughout the employee’s career as a federal employee.

The methods used to calculate the tax-free portion are the same as those described in Chapter 5, Rules for Retirees. It is important to note that the survivor annuitant, usually a spouse, will receive the same monthly amount, tax-free, as the deceased annuitant was receiving at the time of death. This amount represents a return of the deceased annuitant’s contributions to the CSRS or FERS. These contributions that were previously included in the employee’s gross income are returned to the annuitant—and subsequently to the survivor annuitant—tax- free until they are repaid in full.

The amount that the annuitant receives each month tax-free depends on the annuity starting date, the total contributions, and whether a survivor annuity is chosen. OPM will supply to the annuitant each January on Form 1099-R: the gross annuity and the taxable annuity received during the previous 12 months; the annuitant’s total contributions to the CSRS or FERS; federal and state income taxes withheld; and annuitant health insurance premiums paid for all annuities starting after Jan. 1, 2002.

The same information is not given to survivor annuitants. Survivor annuitants only receive information on the gross annuity, federal and state income taxes withheld, and health insurance premiums paid by the survivor annuitant shown on a survivor annuitant’s 1099-R. It is therefore important for survivor annuitants to be aware that a portion of their gross annuity may not be taxable—the portion that is not taxable is a return of the deceased employee/annuitant’s contributions to the CSRS or FERS that have been previously taxed. Once the total contributions are repaid, the entire annuity is fully taxable. How much of the annuity is in fact taxable depends on several factors, including which method is used (the General or the Simplified Rule) and how many survivors (spouse and children) are receiving survivor benefits.

The Simplified Method can be used if the annuity starting date is after July 1, 1986. This method must be used by surviving annuitants if the annuity starting date is after Nov. 18, 1996. Under the Simplified Method, each of the survivor annuitant’s monthly payments is made up of two parts: (1) the tax-free part that is a return of the employee’s cost, and (2) the taxable part that is the amount of each payment that is more than the part that represents the employee’s cost. The tax-free part remains the same, even if the annuity is increased due to cost-of- living allowances (COLAs).


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In addition to a surviving spousal annuity, there are other family members who could receive survivor annuities. These situations are discussed separately below.

situation 1. surviving spouse with no children receiving annuitiesUnder the Simplified Method, the surviving spouse computes the tax-free part of each full monthly annuity payment by dividing the employee’s cost by a number of months based on the surviving spouse’s age. This number will differ depending on whether the annuity starting date is on or before Nov. 18, 1996, or later. Specific instructions for Worksheet 1 are given in Chapter 6 under the Simplified Method.

Example. Donna, age 40, began receiving a $2,000 monthly annuity in March 2012 upon the death of her husband. Donna’s husband was an active federal employee when he died. Donna received 10 payments in 2012. Her husband had contributed $108,000 to the CSRS retirement fund during his federal career.

Donna must use the Simplified Method. Her completed Worksheet 1 is shown on page 30. To complete line 3, she used Table 1 at the bottom of the worksheet. Donna keeps a copy of the completed worksheet for her records.

Donna’s tax-free monthly amount is $300 (line 4 of the worksheet). If Donna lives to collect more than 360 payments ($300 times 360 payments equal $108,000), the payments after the 360th will be fully taxable. If Donna dies before 360 payments have been made, a miscellaneous itemized deduction (not subject to the 2 percent of adjusted gross income fund limit) will be allowed for the unrecovered cost on her final income tax return.

Situation 2. Surviving spouse, with a child also receiving a child’s survivor annuity If the survivor benefits include both a life annuity for the surviving spouse and one or more temporary annuities for the employee’s children, an additional step is needed under the Simplified Method to allocate the monthly exclusion among the beneficiaries correctly.

The total monthly exclusion for all beneficiaries is determined by completing lines 2 through 4 of Worksheet 1 as if only the surviving spouse received an annuity. Then, to calculate the monthly exclusion for each beneficiary, multiply line 4 of the worksheet by a fraction. For any beneficiary, the numerator (top number) of the fraction is that beneficiary’s monthly annuity, and the denominator (the bottom number) of the fraction is the total of the monthly annuity payments to all the beneficiaries.

The conclusion of a child’s temporary annuity does not affect the total monthly exclusion computed under the Simplified Method. The total exclusion simply needs to be reallocated at that time among the remaining beneficiaries. The surviving spouse is entitled to the entire monthly exclusion, as calculated in the worksheet, if she is the only one left drawing an annuity.

Example. The facts are the same as in the preceding example, except that Donna has a son, Richard, who was age 15 at the time of his father’s death. During 2012 Richard is entitled to a $484 per month temporary annuity until he reaches age 18 (age 22 if he remains a full-time student and does not marry).


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Worksheet 1. Simplified Method for Donna

1. Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a ..................................................1. $20,0002. Enter the cost in the plan at the annuity starting date plus any death benefit exclusion* ...............................................................................................................................2. $108,000Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year’s worksheet on line 4 below. Otherwise, go to line 3.3. Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 .............................................................................3. 3604. Divide line 2 by line 3 ............................................................................................................4. $3005. Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 ................................5. $3,0006. Enter any amounts previously recovered tax free in years after 1986 .......................................6. 07. Subtract line 6 from line 2 ......................................................................................................7. $108,0008. Enter the smaller line 5 or line 7 ............................................................................................8. $3,0009. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1009R shows a larger amount, use the amount on this line instead. .............................................................9. $17,00010. Add lines 6 and 8 ................................................................................................................10. $3,00011. Balance of cost to be recovered. Subtract line 10 from line 2 ...........................................11. $105,000




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In completing Worksheet 1 (not shown), Donna fills out the entries through line 4 exactly as shown in the filled-in worksheet for the previous example. That is, Donna includes on line 1 only the amount of the annuity she herself received and she uses on line 3 the 360 factor for the age. Donna must change the $300 monthly exclusion on line 4 to include the allocation between her own annuity and that of her son, Richard.

To find out how much of the monthly exclusion to allocate to her annuity, Donna multiplies the $300 monthly exclusion by the fraction $2,000 (her monthly annuity) over $2,484 (the total of her $2,000 and Richard’s $484 annuity), or:

$300 x $2,000/$2,484, or $241.55

Donna enters $241.55 on line 4. She completes the worksheet by entering $2,465.10 on line 5 and line 8 and $17,535 on line 9.

A second Worksheet 1 (not shown) is completed for Richard’s annuity. On line 1, he enters $4,840 (10 months during 2012 in which he received $484 each month). Lines 2, 3, and 4 are the same as those on his mother’s worksheet. His monthly exclusion is $300 less $241.55 (his mother’s exclusion), or $58.45 per month. His exclusion for the year (line 8) is $584.50 (10 x $58.45) and his taxable annuity for the year 2012 is $4,840 less $584.50, or $4,255.50 (line 9).

When Richard’s temporary annuity ends, the computation of Donna’s gross monthly annuity will not change. The only difference will be the taxable portion of Donna’s annuity

situation 3: surviving Child only A technique similar to the Simplified Method can be used to figure the taxable and nontaxable parts of a temporary annuity for a surviving child when there is no surviving spousal annuity. To use this method, divide the deceased employee’s cost by the number of months from the child’s annuity starting date until the date the child will reach age 22. The result is the monthly exclusion. However, the monthly exclusion cannot be more than the monthly annuity payment. Any unused exclusion amounts can be carried over to subsequent years to apply against future annuity payments.

If there is more than one child entitled to a temporary annuity and no surviving annuity, then the cost is divided by the number of months of payments until the date the youngest child will reach age 22. This monthly exclusion must then be allocated among the children in proportion to their monthly annuity payment.

If the annuity starting date is after 1986, then the most that can be recovered tax-free is the cost of the annuity. Once the total of one’s exclusion equals the cost, the entire annuity is taxable. If the annuity starting date is before 1987, the tax-free part of each whole monthly payment remains the same each year the survivor receives payment—even if the survivor annuitant outlives the number of months used on line 3 of the Simplified Method worksheet. The total exclusion may be more than the cost of the annuity.

If the annuity starting date is after July 1, 1986, and the annuitant’s death occurs before all of the cost is recovered tax-free, the unrecovered cost can be claimed as a miscellaneous itemized deduction, not subject to the


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2 percent of adjusted gross income limit, for the annuitant’s last income tax return.

Lump-Sum Payment of CSRS or FERS Retirement Contributions If a federal employee dies before retiring and leaves no one as an eligible survivor annuitant, then the estate or other beneficiary(s) will receive a lump-sum payment of the deceased employee’s contributions to the CSRS or FERS. This single payment is made up of the regular contributions to the retirement fund plus accrued interest, if any, to the extent not already paid to the employee.

The beneficiary is taxed in the year the lump sum is distributed or made available only on the amount of any accrued interest. The taxable amount, if any, generally cannot be rolled over into an IRA or other retirement plan and is subject to federal income tax withholding at a 10 percent rate.

If an annuity is paid to the federal employee’s survivor, and the survivor annuity ends before an amount equal to the deceased employee’s contributions plus any interest has been paid out, the remainder of the contributions plus any interest will be paid in a lump sum to the employee’s estate or other beneficiary. In general, a beneficiary will not have to include any of the lump sum in their gross income, because when it is added to the amount of the annuity previously received that was excludable, the lump sum will still be less than the employee’s total contributions. The taxable amount, if any, cannot be rolled over into an IRA or other retirement plan, and is subject to federal income tax withholding.

Worksheet 5 (see the Appendix) can be used to determine the taxable amount of a CSRS or FERS lump-sum payment. Here is an example that illustrates.

Example. Jim, a federal employee, died suddenly in December 2009. At the time of his death, Jim had contributed $100,000 to the CSRS. Jim’s widow, Catherine, received $12,600 in survivor annuity benefits before she died in 2012. She had used the Simplified Method for reporting her annuity and properly excluded $3,000 from gross income. Jim’s brother David was named as beneficiary of Jim’s unpaid CSRS contributions. Only $12,600 of the guaranteed amount of $100,000 (Jim’s contributions) was paid as part of Catherine’s survivor annuity. Therefore, the balance of $87,400 was paid in a lump sum to David, Jim’s sole beneficiary. The taxable amount of the payment is figured using Worksheet 5 as follows:

Thrift savings PlanAny death benefits paid from the traditional TSP to a beneficiary is fully taxable to the beneficiary. Spousal TSP

Worksheet 5. Lump-Sum Payment at End of Survivor Annuity

1. Enter the lump-sum payment ........................................... 1. $87,4002. Enter the amount of annuity previously received tax-free ................................................................ 2. $3,0003. Add lines 1 and 2 .............................................................. 3. $90,4004. Enter the employee’s total cost .......................................... 4. $100,0005. Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero ............................. 5. 0


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beneficiaries can generally roll over the payment tax-free to a traditional IRA or to the spouse’s TSP account if the surviving spouse is a federal employee participating in the TSP. If a direct rollover of the decedent’s TSP account is not chosen, then a mandatory 20 percent federal income tax withholding will apply. Starting on Jan. 1, 2007, a non-spousal TSP beneficiary has the option of rolling over any portion of the TSP death benefit into an inherited IRA. The TSP will withhold 10 percent of the payment for federal income tax, unless the beneficiary fills out and submits to the TSP form W-4P requesting no federal income tax withholding.

If the entire TSP account balance is paid to the beneficiary in the same calendar year, then it may qualify as a lump-sum distribution eligible for the 10-year tax option. This can only occur if the beneficiary was born before Jan. 2, 1936.

11. rules for survivors of federal retirees Retirement benefits accrued and payable to a CSRS or FERS retiree before death, but paid to a survivor annuitant, are taxable in the same manner and to the same extent as would have been taxable had the retiree lived to receive them.

Csrs or fers survivor annuity CSRS or FERS annuity payments received by a survivor annuitant are fully or partly taxable under either the General Rule or the Simplified Method. If the retiree had reported the annuity under the Three-Year Rule and recovered all of the cost tax-free, then the survivor annuity payments are fully taxable. This is also true if the retiree had an annuity starting date after 1986, reported the CSRS or FERS annuity under the General Rule or the Simplified Method, and had fully recovered the cost tax-free.

If the retiree was reporting the annuity under the General Rule, then the survivor annuitant will use the same exclusion percentage that the retiree used. The exclusion percentage will be applied to the amount specified as the survivor annuity at the retiree’s annuity starting date. The exclusion percentage is not to be applied to any cost- of-living increases made after that date. These increases are fully taxable. For more information about the General Rule, IRS Publication 939 should be used.

If the retiree was reporting the annuity under the Simplified Method, the survivor annuitant’s tax-free monthly amount is the same as the retiree’s monthly exclusion (see line 4 of Simplified Method, Worksheet 1). This amount remains fixed even if the monthly payment is increased or decreased. A COLA increase in one’s survivor annuity benefits does not change the amount that one can exclude from gross income.

If the CSRS or FERS annuity starting date is after July 1, 1986, and the survivor annuitant’s death occurs before all of the cost is recovered tax-free, then the unrecovered cost can be claimed as a miscellaneous itemized deduction not subject to the 2 percent of adjusted gross income limit on the survivor annuitant’s final income tax return.


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If there is a child or children receiving a temporary annuity—until age 18 or 22—as well as a spouse receiving a life annuity, then the tax-free monthly amount that would otherwise apply to the life annuity must be allocated among the beneficiaries. To compute the tax-free monthly amount for each beneficiary, the total tax-free monthly amount is multiplied by a fraction. The numerator of the fraction is the beneficiary’s monthly annuity amount, and the denominator is the total of the monthly annuity payments to all the beneficiaries

Example. Ivan retired in 2010 and began receiving a $1,250-per-month CSRS retirement annuity with a survivor annuity payable to his wife, Maria, upon his death. He reported his annuity using the Simplified Method. Under that method, $200 of each payment that Ivan received was a tax-free recovery of his $82,000 cost. Ivan received a total of 26 monthly payments and recovered $5,200 (26 months x $200 per month) of his cost tax-free before his death in 2012. At Ivan’s death, Maria began receiving an annuity of $720 per month. Ivan’s children, Carl (age 19) and Sandra (age 21), both full-time students, each began receiving temporary children survivor annuities of $484 per month during 2012. This will terminate when they each reach age 22. Maria must allocate the $200 tax-free monthly payment among the three annuities. She does it as follows:

Maria’s tax-free allocation equals

$200 x $720/($720 + $484 + $484)

or $200 x 0.43, or $86, of the $200 tax-free monthly annuity amount to her annuity

Maria will allocate

$200 x $484/($720 + $484 + $484)

or $200 x 0.29, or $58 of the $200 tax-free monthly annuity amount to both Carl’s and Sandra’s monthly annuities of $484 per month

Beginning in the month in which Sandra, currently age 21, turns age 22, her temporary annuity ceases. Maria will allocate the $58 of Sandra’s tax-free monthly annuity portion to her tax-free monthly annuity portion. Finally, when Carl’s temporary annuity ceases, Maria will allocate the $58 tax-free portion of Ivan’s monthly annuity to her tax-free monthly annuity portion, resulting in her monthly annuity having a tax-free portion of $200.

If the survivor benefits include only a temporary annuity for the retiree’s child, then the unrecovered cost will be allocated over the number of months from the date the annuity started until the child reaches age 22. If more than one temporary annuity is paid, then the cost should be allocated over the number of months until the youngest child reaches age 22, and the tax-free monthly amount allocated among the annuities in proportion to the monthly annuity payments.

Lump-Sum Payment of CSRS or FERS Contributions If a deceased retiree has no beneficiary eligible to receive a survivor annuity, and the deceased retiree’s annuity ends before reaching an amount equal to the deceased retiree’s contributions—plus any interest that has been paid out—the rest of the contributions plus any interest will be paid in a lump sum to the estate or to another


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beneficiary. The retiree should have filled out form SF-2808, Designation of Beneficiary of Lump-Sum CSRS, or form SF-3102, Designation of Beneficiary of Lump-Sum FERS. The estate or other beneficiary rarely will have to include any part of the lump sum in gross income. Worksheet 6 (see the Appendix) may be used to determine the tax-free amount.

The taxable amount, if any, generally cannot be rolled over into an IRA or other plan and is subject to federal income tax withholding at a 10 percent rate. If the plan participant was born before Jan. 2, 1936, the taxable amount may qualify as a lump-sum distribution eligible for capital gain treatment or 10-year lump-sum averaging. For more information, see IRS Publication 575, “Lump-Sum Distributions.”

Thrift savings Plan (TsP) All TSP payments made to beneficiaries of a deceased TSP account owner are fully taxable. A surviving spouse can roll over this taxable payment tax-free to a traditional IRA, or if the surviving spouse is a federal employee, to their own TSP account. Effective Jan. 1, 2007, non-spousal TSP beneficiaries can roll over inherited TSP funds into an inherited IRA.

A survivor who receives a deceased TSP account owner’s TSP annuity as a TSP survivor annuitant must include all TSP annuity payments as income upon receipt. In addition, any inherited TSP annuity payments received as a cash refund of the remaining value of the TSP annuity must be included in income.

income in respect of a decedent Any income that a decedent had a right to receive and could have received had death not occurred, and that was not properly included in the decedent’s final income tax return, is treated as income in respect of a decedent. This includes retirement benefits accrued and payable to a retiree before death but paid to a survivor.

For more information, see IRS Publication 559, “Income in Respect of the Decedent.”

12. Volunteer Contribution Program (VCP) Withdrawals CSRS and CSRS Offset employees may invest after-tax dollars in the Civil Retirement and Disability Fund. These contributions to the retirement fund are made in addition to the regular contribution that was deducted from one’s salary. This investment earns interest—tax-deferred at a variable rate determined by the Treasury Department each calendar year.

Upon retiring from federal service, an employee has three options regarding what to do with accumulated monies in the VCP.

• Refund of voluntary contributions and accumulated interest. Voluntary contributions are tax- free because they have already been taxed. Accrued interest is fully taxable and OPM will withhold


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federal income tax on the interest payment at a rate of 20 percent. Interest payment does not qualify as a lump-sum distribution eligible for capital gain treatment or 10-year special lump-sum averaging. Interest payment may be subject to an additional 10 percent tax on early distribution if the employee separates from service before age 55.

• Rollover of voluntary contributions to an existing Roth IRA and direct rollover of accrued interest to a traditional IRA or to the TSP. A direct rollover is a tax-free withdrawal of cash or other assets from one qualified retirement plan to a traditional IRA or to another retirement plan. If OPM makes a direct rollover or a direct transfer (“trustee-to-trustee” transfer), then there is no income tax withholding on the rollover or transfer of accrued interest.

• Additional annuity benefit. Additional annuities chosen by departing or retiring employees, from the voluntary contributions, will have this annuity treated separately from the regular contributing annuity benefit that was deducted from one’s salary. In fact, each year a CSRS retiree will receive a Form CSA 1099R that will show how much of one’s total annuity received in the past was from each type of benefit. The taxable and tax-free parts of the additional annuity benefit are figured in the same way the taxable and tax-free parts of the regular CSRS annuity are calculated.

Example. During her 35-year federal career, as part of the Voluntary Contribution Program, Elizabeth contributed on her own $75,000 to the CSRS Retirement and Disability Fund. When she retired on March 20, 2012, at age 60, Elizabeth is entitled to an additional annuity benefit of $6,000 per year, or $500 per month. Elizabeth wants to determine how much of her $500 monthly annuity payment is taxable. She uses the Simplified Method to determine that. Here are the relevant facts, and Worksheet 1 is shown on the next page.

Cost of Annuity: $75,000

Age at Retirement: 60

Single Annuity (no joint annuitant)

Monthly Payment: $500 per month

$2,322 of the $4,500 gross annuity received during 2012 is found to be taxable—nine months with $500 gross annuity paid each month. The other $2,178, $181 per month, is considered to be a return of Elizabeth’s cost— her contributions, which were already taxed, are tax-free. Worksheet 1 follows.


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Worksheet 1. Simplified Method for Elizabeth

1. Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a ..................................................1. $4,5002. Enter your cost in the plan at the annuity starting date plus any death benefit exclusion*. ..............................................................................................................................2. $75,000Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year’s worksheet on line 4 below. Otherwise, go to line 3.3. Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1. ............................................................................3. 3104. Divide line 2 by line 3 ............................................................................................................4. $2425. Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6. ................................5. $2,1786. Enter any amounts previously recovered tax free in years after 1986. ......................................6. 07. Subtract line 6 from line 2 ......................................................................................................7. $75,0008. Enter the smaller line 5 or line 7 ............................................................................................8. $2,1789. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1009R shows a larger amount, use the amount on this line instead ..............................................................9. $2,32210. Add lines 6 and 8 ................................................................................................................10. $2,17811. Balance of cost to be recovered. Subtract line 10 from line 2 ...........................................11. $72,822




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rules for survivors of federal employees If a CSRS employee dies before retiring from government service, then any voluntary contribution to the retirement fund cannot be used to provide an additional annuity to the survivors. Instead, the voluntary contributions, plus any accrued interest, will be paid in a lump sum to the estate or other beneficiary. The beneficiary generally must include any interest received as income for the year, distributed or made available. A spousal beneficiary is permitted to roll over the monies to a traditional IRA.

The interest, if not rolled over, generally is subject to deferral income tax withholding at a 20 percent rate, or at a 10 percent rate if the beneficiary is not the employee’s surviving spouse. It may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year lump-sum average option if:

• The plan participant was born before Jan. 2, 1936.

• The system does not allow payment of regular annuity benefits.

• The beneficiary also receives a lump-sum payment of the regular contributions plus interest within the same tax year as the voluntary contribution.

rules for survivors of federal retirees A survivor of a deceased federal retiree who receives an additional survivor annuity benefit from voluntary contributions to the CSRS will treat it separately from the annuity that came from regular contributions. Each year the survivor will receive a CSF 1099R that will show how much of the total annuity received in the past year was from each type of benefit.

The taxable and tax-free parts of the additional survivor annuity from voluntary contributions are determined using the same rules that apply to regular CSRS and FERS survivor annuities.

Example. Same facts as in previous example, except that Elizabeth has named her 57-year-old brother as the survivor annuitant of her additional annuity benefit. Under the rules for the voluntary contribution program, Elizabeth’s brother will receive an annuity of 50 percent of what Elizabeth was receiving, $250 per month. Elizabeth died in January 2012. Her brother received 11 payments (for February through December 2012) of $250 per month, or $2,750. Worksheet 1 follows.


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Worksheet 1. Simplified Method for Elizabeth

1. Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a. .................................................1. $2,7502. Enter your cost in the plan at the annuity starting date plus any death benefit exclusion*. ..............................................................................................................2. $75,000Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year’s worksheet on line 4 below. Otherwise, go to line 3.3. Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 .............................................................................3. 3104. Divide line 2 by line 3. ...........................................................................................................4. $2425. Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 .................................5. $2,6626. Enter any amounts previously recovered tax free in years after 1986 .......................................6. $2,1787. Subtract line 6 from line 2 ......................................................................................................7. $72,8228. Enter the smaller line 5 or line 7 .............................................................................................8. $2,6629. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1009R shows a larger amount, use the amount on this line instead ..............................................................9. $8810. Add lines 6 and 8 ................................................................................................................10. $2,26611. Balance of cost to be recovered. Subtract line 10 from line 2 ..............................................11. $72,734




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13. other Tax issues

rollovers to roth iras Effective Jan. 1, 2010, both the income and filing status limitations for converting a traditional IRA to a Roth IRA or to rolling over pension distributions to a Roth IRA were removed. That means that all CSRS and FERS annuitants with TSP accounts may transfer all or a portion of their TSP accounts to an existing Roth IRA.

Any amount rolled over to a Roth IRA is subject to the same rules as for converting a traditional IRA into a Roth IRA. For more information, see “Converting from any Traditional IRA into a Roth IRA” in Chapter 1 of IRS Publication 590 (available for download at www.irs.gov).

Csrs or fers distributions Used to Pay insurance Premiums for Public safety Officers Federal annuitants who are retired law enforcement officers or firefighters can elect to exclude from income CSRS or FERS distributions used to pay the premiums for health insurance or long-term care insurance. The premiums can be for coverage for the annuitant, the annuitant’s spouse or dependents. Up to $3,000 each year may be excluded from income. This election can be made on amounts that would otherwise be included in income. The amount excluded from income may not be used to claim a medical expense deduction.

An annuitant’s CSA 1099-R does not reflect the exclusion as part of the taxable annuity shown on the 1099-R. The total distribution is reported on IRS Form 1040, line 16a or Form 1040A, line 12a. The taxable annuity amount is reported on Form 1040, line 16, or Form 1040A, line 12b. The letters “PSO” should be entered next to the appropriate line on which the taxable annuity is reported.

Tax relief in the midwestern disaster areas Special rules apply to the use of retirement funds by qualified individuals who suffered an economic loss in the Midwestern disaster areas as a result of the severe storms, tornadoes or flooding during 2008. For more information, see IRS Publication 4492-B, “Information for Affected Taxpayers in the Midwestern Disaster Areas.” Also, see IRS Publication 8930, “Qualified Disaster Recovery Assistance Retirement Plan Distributions and Repayments.”

nonresident aliens A nonresident alien working for the government contributes to a retirement plan as part of the cost into the plan. Also included to a certain extent are the government’s contributions to the plan. These government contributions would not have been taxable to the nonresident alien at the time they were contributed had they been contributed directly to the nonresident alien. For example, government contributions would not be taxable if they were made for services rendered by a nonresident alien outside the United States. Therefore, the cost in the plan is increased and the benefits that the nonresident alien or a beneficiary must include in income are reduced.


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There is a limit on the taxable amount of payments received from the CSRS, the FERS, or the TSP by a nonresident alien. This limited taxable amount is in the same proportion to the otherwise taxable amount of the retiree’s total U.S. government basic pay. This does not include tax-exempt pay for services performed outside the United States.

Basic pay includes regular pay plus standby differential pay. It does not include bonuses, overtime pay, certain retroactive pay, uniformed or other allowances, or lump-sum leave payments.

To calculate the limited amount of a nonresident alien’s CSRS or FERS annuity or TSP distribution, use Worksheet 7 in the Appendix. Here are two examples which might help illustrate the limited taxable amount for a nonresident alien.

Example. A nonresident alien who performed all services for the U.S. government abroad retired and began to receive a monthly annuity of $200. The total basic pay for all services for the U.S. government was $100,000. The taxable amount of the annuity, using Worksheet 1 (see the Appendix), is $720. Using Worksheet 7, the nonresident alien calculates his limited taxable amount.

Example. A nonresident alien performed services for the U.S. government both outside and within the United States. The individual retired and began receiving a monthly annuity of $240. This person’s pay for services for the United States was $200,000. $50,000 was payment for working within the United States and $150,000 was payment for services performed abroad.

Worksheet 7. Limited Taxable Amount for a Nonresident Alien


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The taxable portion of the annuity is calculated using Worksheet 1 and the limited taxable amount of the annuity is computed as follows:

new medicare surtaxesAn additional Medicare Hospital Insurance (HI) payroll tax and a new Medicare surtax on investment income took effect on Jan. 1, 2013, as a result of passage of the Patient Protection and Affordable Care Act of 2010. Only high-income individuals are affected by the new Medicare surtaxes. These surtaxes are each discussed.

The first Medicare surtax is a 0.9 percent Medicare Hospital Insurance (HI) surtax imposed on earned income (salary, wages and net employment income). The 0.9 Medicare Part A HI tax is in addition to the current Medicare Part A HI payroll tax equal to 1.45 percent of an employee’s gross wages. Employees pay the Medicare Part A HI tax through payroll deduction. Single individuals with modified adjusted gross incomes exceeding $200,000 and married individuals with modified adjusted gross incomes exceeding $250,000 (married individuals filing separate with modified adjusted gross incomes exceeding $125,000) are subject to the additional 0.9 percent Medicare Part A HI tax, meaning that their wages are subject to a 2.35 percent Medicare Part A HI payroll tax. Modified adjusted gross income is adjusted gross income plus any foreign earned income exclusion.

The second Medicare surtax is a 3.8 percent surtax that is imposed on investment income. Only high-income individuals—the same individuals who are subject to the 0.9 percent Medicare HI surtax imposed on earned income—are subject to the 3.8 percent Medicare surtax. This surtax is levied on the smaller of an individual’s net investment income or the excess of the modified adjusted gross income exceeding the applicable modified adjusted gross income threshold. Net investment income includes taxable interest, dividends, capital gains, nonqualified annuity payments, royalties and passive rental income. Tax-free interest income is exempted, along with payments from retirement plans such as CSRS and FERS annuities, the Thrift Savings Plan and 401(k) plans, and IRAs.

federal Gift and estate TaxesThe American Taxpayer Relief Act of 2012 provides for a maximum federal gift and estate tax rate of 40 percent with


1. Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet 1) or TSP distribution 1. $1,980

2. Enter the total U.S. government basic pay other than tax-exempt pay for services performed outside the United States 2. $50,000

3. Enter the total U.S. government basic pay for all services 3. $200,000

4. Divide line 2 by line 3 4. 0.2505. Limited taxable amount. Multiply line 1 by

line 4. Enter this amount on Form 1040NR, line 17b 5. $495


43

an annually inflation-adjusted unified gift and estate exemption of $5 million for gifts made after Dec. 31, 2012, and for the estates of decedents dying after Dec. 31, 2012. For 2013, the gift and estate tax exemption is $5.25 million.

federal Gift Tax A gift can be made when a federal employee, through the exercise or lack of exercise of an election or option, provides an annuity for a non-spousal beneficiary at the employee’s death. The gift may be taxable for gift tax purposes and the value of the gift is equal to the value of the annuity.

If the gift is an interest in a joint and survivor annuity, where only the retiree and a spouse can receive payments before the death of the last spouse, then the gift would generally qualify for the unlimited marital deduction. This would eliminate any gift tax liability. This does not apply if survivor annuity benefits are for someone besides the current spouse. This may result in a taxable gift.

For more information, see IRS Publication 950, “Introduction to Estate and Gift Taxes,” and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return and its instructions.

federal estate Tax The 2010 Tax Relief Act reinstituted the federal estate tax effective Jan. 1, 2011. The 2010 Tax Relief Act also provided that for gifts made after Dec. 31, 2010, the federal gift tax was reunited with the federal estate tax, with a tax rate through 2012 of 35 percent and an applicable lifetime unified exclusion of $5 million (adjusted annually for inflation). For 2012, the lifetime unified exclusion amount was $5.12 million.

Furthermore, starting Jan. 1, 2011, when one spouse dies, any unused portion of that spouse’s estate tax exemption amount may be transferred to the surviving spouse. There are many planning opportunities and pitfalls regarding these new provisions.

The gross estate generally includes the value of all property beneficially owned by the decedent at the time of death. Examples of property included in the gross estate are salary or annuity payments that had accrued to an employee or retiree, but which were not paid before death, and the balance in the decedent’s TSP account.

The gross estate might also include the value of the survivor benefits payable under the CSRS or the FERS. If the federal employee died leaving no one eligible to receive a survivor annuity, then the lump sum—representing the employee’s contributions to the system plus any accrued interest—is payable to the estate or any other beneficiary who is included in the employee’s gross estate. If the decedent owned any life insurance at the time of death, then the gross proceeds paid out will also be included in the decedent’s gross estate.

The estate tax marital deduction is a deduction of the value of property that is included in the gross estate, but that passes, or has passed on to the surviving spouse. Generally, there is no limit on the amount of the marital deduction. Community property passing to the surviving spouse qualifies for the marital deduction.

For more information see IRS Publication 950, “Introduction to Estate and Gift Taxes,” and Publication 559, “Survivors, Executors, and Administrators.”


44

ALABAMA

ALASKA

ARIZONA

ARKANSAS

CALIFORNIA

COLORADO

CONNECTICUT

DELAWARE

DISTRICT OF COLUMBIA

FLORIDA

GEORGIA

HAWAII

IDAHO

ILLINOIS

INDIANA

IOWA

KANSAS

KENTUCKY

LOUISIANA

MAINE

MARYLAND

MASSACHUSETTS

MICHIGAN

MINNESOTA

MISSISSIPPI

MISSOURI

MONTANA

NEBRASKA

NEVADA

NEW HAMPSHIRE

NEW JERSEY

NEW MEXICO

NEW YORK

NORTH CAROLINA

NORTH DAKOTA

OHIO

OKLAHOMA

OREGON

PENNSYLVANIA

RHODE ISLAND

SOUTH CAROLINA

SOUTH DAKOTA

TENNESSEE

TEXAS

UTAH

VERMONT

VIRGINIA

WASHINGTON

WEST VIRGINIA

WISCONSIN

WYOMING

www.revenue.alabama.gov

www.alaska.gov

www.azdor.gov

www.dfa.arkansas.gov

www.ftb.ca.gov

www.colorado.gov/revenue

www.ct.gov/drs

www.revenue.delaware.gov

www.otr.cfo.dc.gov

dor.myflorida.com/dor/taxes

www.dor.ga.gov

www.hawaii.gov/tax

www.tax.idaho.gov

www.tax.illinois.gov

www.in.gov/dor

www.iowa.gov/tax

www.ksrevenue.org

www.revenue.ky.gov

www.revenue.louisiana.gov

www.maine.gov/revenue

www.marylandtaxes.com

www.dor.ms.gov

www.michigan.gov/taxes

www.trevenue.state.mn.us

www.mstc.state.ms.us

www.dor.mo.gov/tax

www.revenue.mt.gov

www.revenue.ne.gov

www.tax.state.nv.us

www.revenue.nh.gov

www.state.nj.us/treasury/taxation

www.tax.state.newmexico.gov

www.nystax.gov

www.dornc.com

www.nd.gov/tax

www.tax.ohio.gov

www.tax.ok.gov

www.oregon.gov/dor

www.revenue.state.pa.us

www.tax.ri.gov

www.sctax.org

www.state.sd.us/drr2/revenue.html

www.tn.gov/revenue

www.window.state.tx.us/taxes/

www.tax.utah.gov

www.tax.vt.us/tax

www.tax.virginia.gov

www.dor.wa.gov/

www.state.wv.us/taxdiv/

www.revenue.wi.gov

revenue.state.wy.us/

State Income Tax Treatment of CSRS/FERS Annuities (2012)*

*Please refer to the state’s website for detailed information.


45

appendix


46

Figure 1. Sample Form CSA 1099-R (annuity benefits paid to an annuitant) for 2012

Figure 2. Sample Form CSF 1099-R (annuity benefits paid to a survivor annuitant) for 2012


47

Figure 3. FORM SSA-1099 – SOCIAL SECURITY BENEFIT STATEMENT

Figure 4. Sample 2012 1099-R Reporting Distributions from Pensions, Annuities, etc.


48

Worksheet 1. Simplified Method

1. Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a ..................................................1. _______2. Enter your cost in the plan at the annuity starting date plus any death benefit exclusion* ...............................................................................................................................2. _______Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year’s worksheet on line 4 below. Otherwise, go to line 3.3. Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 .............................................................................3. _______4. Divide line 2 by line 3 ............................................................................................................4. _______5. Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 .................................5. _______6. Enter any amounts previously recovered tax-free in years after 1986 .......................................6. _______7. Subtract line 6 from line 2.. ....................................................................................................7. _______8. Enter the smaller line 5 or line 7 ............................................................................................8. _______9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1009R shows a larger amount, use the amount on this line instead. .............................................................9. _______10. Add lines 6 and 8 ................................................................................................................10. _______11. Balance of cost to be recovered. Subtract line 10 from line 2 ...........................................11. _______

Table 1 for line 3 above And your Annuity starting date was-If the age at before Nov. 19, 1996, after Nov. 18, 1996, annuity starting date was… enter on line 3… enter on line 3…55 or younger 300 36056-60 260 31061-65 240 26066-70 170 21071 or older 120 160

Table 2 for line 3 aboveIf the combined ages atannuity starting date were… Then enter on line 3…110 or less 410111-120 360121-130 310131-140 260141 or more 210

*A death benefit exclusion up to $5,000 is applied to certain benefits received by survivors of employees who died before Aug. 21, 1996.


49

Worksheet 2. Lump-Sum Payment

1. Enter your lump-sum credit (your cost in the plan at the annuity starting date) ..............................................................................................................1. _______2. Enter the present value of your annuity contract ....................................................................2. _______3. Divide line 1 by line 2 ............................................................................................................3. _______4. Tax-free amount. Multiply line 1 by line 3 ............................................................................4. _______5. Taxable amount. Subtract line 4 from line 1. Include this amount in the total on line 16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet 1 in this publication .....................................5. _______


50


Name: SSN: Filing Status: Married Filing JointlyCurrent Tax Year: 2011

1. Total Social Security and RRB benefits received ................................................... $________2. 50% of SSA benefits (0.5 * line 1) ........................................................................ $________3. Adjusted gross income w/o SSA and RRB benefits ............................................... $________4. Exempt income






(after 12/31/02) .........................................................................

Total: line 4 ............... $________5. Provisional income (line 2 + line 3 + line 4) ......................................................... $________6. Base amount 1 (Status A: $44,000, B: -0-, C: $34,000) ....................................... $________7. Base amount 2 (Status A: $32,000, B: -0-, C: $25,000) ....................................... $________8. 50% of (line 5 – line 7) (not less than -0- ) .......................................................... $________9. 50% of (line 6 – line 7) ........................................................................................ $________10. Taxable SSA and/or RRB income under 50% Rule

(smallest of line 2, line 8, or line 9) .................................................................... $________11. Taxable SSA and/or RRB under 85% Rule

85% of (line 5 – line 6) (not less than -0- ) ........................................................ $________12. Sum of line 10 and line 11 ................................................................................. $________13. 85% of SSA and/or RRB benefits (0.85 * line 1) ............................................... $________14. Total taxable SSA and/or RRB income

(smaller of line 12 or line 13) ............................................................................ $________


2012


51


Name: SSN: Filing Status: C – Single, HH, QW, MFS living Apart All YearCurrent Tax Year: 2011

1. Total Social Security and RRB benefits received ................................................... $________2. 50% of SSA benefits (0.5 * line 1) ........................................................................ $________3. Adjusted gross income w/o SSA and RRB benefits ............................................... $________4. Exempt income






(after 12/31/02) .........................................................................

Total: line 4 ............... $________5. Provisional income (line 2 + line 3 + line 4) ......................................................... $________6. Base amount 1 (Status A: $44,000, B: -0-, C: $34,000) ....................................... $________7. Base amount 2 (Status A: $32,000, B: -0-, C: $25,000) ....................................... $________8. 50% of (line 5 – line 7) (not less than -0- ) .......................................................... $________9. 50% of (line 6 – line 7) ........................................................................................ $________10. Taxable SSA and/or RRB income under 50% Rule

(smallest of line 2, line 8, or line 9) .................................................................... $________11. Taxable SSA and/or RRB under 85% Rule

85% of (line 5 – line 6) (not less than -0- ) ........................................................ $________12. Sum of line 10 and line 11 ................................................................................. $________13. 85% of SSA and/or RRB benefits (0.85 * line 1) ............................................... $________14. Total taxable SSA and/or RRB income

(smaller of line 12 or line 13) ............................................................................ $________


2012


52

Worksheet 5. Lump-Sum Payment at End of Survivor Annuity

1. Enter the lump-sum payment ........................................... 1. _______2. Enter the amount of annuity previously received tax-free ................................................................ 2. _______3. Add lines 1 and 2 .............................................................. 3. _______4. Enter the employee’s total cost .......................................... 4. _______5. Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero ............................. 5. _______

Worksheet 6. Lump-Sum Payment to Estate or Other Beneficiary

1. Enter the lump-sum payment ........................................... 1. _______2. Enter the amount of annuity previously received tax-free ................................................................ 2. _______3. Add lines 1 and 2 .............................................................. 3. _______4. Enter the employee’s total cost .......................................... 4. _______5. Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero ............................. 5. _______


1. Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet 1) or TSP distribution 1. _______

2. Enter the total U.S. government basic pay other than tax-exempt pay for services performed outside the United States 2. _______

3. Enter the total U.S. government basic pay for all services 3. _______

4. Divide line 2 by line 3 4. _______5. Limited taxable amount. Multiply line 1 by

line 4. Enter this amount on Form 1040NR, line 17b 5. _______


53

IRS Resources

The IRS has a number of publications that can assist federal employees with preretirement and post-retirement tax planning and preparation. These publications include:

Publication Number Name of Publication

17 Your Federal Income Tax (for Individuals) 519 U.S. Tax Guide for Aliens 559 Survivors, Executors and Administrators 575 Pension and Annuity Income 721 Tax Guide to U.S. Civil Service Retirement Benefits 915 Social Security and Equivalent Railroad Retirement Benefits 939 General Rule for Pensions and Annuities 950 Introduction to Estate and Gift Taxes

Important IRS forms for federal retirees:

CSA 1099R Statement of Annuity Paid CSF 1099R Statement of Survivor Annuity Paid 1099-R Distributions from Pensions, Annuities, Retirement or Profit Sharing Plan SSA-1099 Social Security Benefit Statement

5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts 1040NR Nonresident Alien Tax Return

These forms and publications may be downloaded from the IRS Web site at www.irs.gov or by ordering forms, instructions and publication via telephone at 1-800-829-3676.

IRS tax products on a CD-ROM may be ordered through IRS Publication 1796, “Federal Tax Products.” The CD-ROM may be purchased from National Technical Information Service (NTIS) on the Internet at www.ntis.gov for $30 or by calling NTIS 1-877-233-6767 to buy the CD-ROM for $36.

A Web site that gives links to state tax forms, publications and information for all 50 states, the District of Columbia and U.S. territories can be found at: www.sisterstates.com.

For information on specific state questions, go to www.taxsites.com/state.html#links.


54

Office of Personnel Management (OPM) Forms(available for download at www.opm.gov)

Form Purpose

SF-1152 Claim for Compensation of Designation of Beneficiary – Unpaid Compensation of Deceased Civilian Employee

SF-2808 Designation of Beneficiary, Civil Service Retirement System

SF-3102 Designation of Beneficiary, Federal Employees Retirement System


55

Single Life Table

Age Distribution Age Distribution Age Distribution Period Period Period

30 ........................... 53.3 58 ........................... 27.0 85 ........................... 7.631 ........................... 52.4 59 ........................... 26.1 86 ........................... 7.132 ........................... 51.4 60 ........................... 25.2 87 ........................... 6.733 ........................... 50.4 61 ........................... 24.4 88 ........................... 6.334 ........................... 49.4 62 ........................... 23.5 89 ........................... 5.935 ........................... 48.5 63 ........................... 22.7 90 ........................... 5.536 ........................... 47.5 64 ........................... 21.8 91 ........................... 5.237 ........................... 46.5 65 ........................... 21.0 92 ........................... 4.938 ........................... 45.6 66 ........................... 20.2 93 ........................... 4.639 ........................... 44.6 67 ........................... 19.4 94 ........................... 4.340 ........................... 43.6 68 ........................... 18.6 95 ........................... 4.141 ........................... 42.7 69 ........................... 17.8 96 ........................... 3.842 ........................... 41.7 70 ........................... 17.0 97 ........................... 3.643 ........................... 40.7 71 ........................... 16.3 98 ........................... 3.444 ........................... 39.8 72 ........................... 15.5 99 ........................... 3.1 45 ........................... 38.8 73 ........................... 14.8 100 ......................... 2.946 ........................... 37.9 74 ........................... 14.1 101 ......................... 2.747 ........................... 37.0 75 ........................... 13.4 102 ......................... 2.548 ........................... 36.0 76 ........................... 12.7 103 ......................... 2.349 ........................... 35.1 77 ........................... 12.1 104 ......................... 2.150 ........................... 34.2 78 ........................... 11.4 105 ......................... 1.951 ........................... 33.3 79 ........................... 10.8 106 ......................... 1.752 ........................... 32.3 80 ........................... 10.2 107 ......................... 1.553 ........................... 31.4 81 ........................... 9.7 108 ......................... 1.454 ........................... 30.5 82 ........................... 9.1 109 ......................... 1.255 ........................... 29.6 83 ........................... 8.6 110 ......................... 1.156 ........................... 28.7 84 ........................... 8.1 111+ ....................... 1.057 ........................... 27.9

For ages not covered in table above, see IRS Publication 590.


56

Post-Death Distribution Rules Depending on Beneficiary Designations

Spouse is SoleDesignated Beneficiary

Non-spouse Individual

Trust

No Beneficiary(Estate or Charity)

RMDs1 postponed until the later of the:- Year following the participant’s death,- Year the participant would haveattained 70.5, or- End of the fifth year after the participant’sdeath, if the plan permits and the survivingspouse elects.RMDs over the spouse’s life expectancy(unless the five-year rule is used).

Rollover available.

RMDs over the life of the designatedbeneficiary beginning in the year followingdeath (otherwise, distribution must becompleted by the end of the fifth yearfollowing the participant’s death).

Rollover not available.

RMDs over the life of the oldest trustbeneficiary beginning in the year followingdeath if the trust qualifies as a designatedbeneficiary.

If the trust does not qualify as a designatedbeneficiary, RMDs must be completed bythe end of the fifth year following theparticipant’s death.

Possible spousal rollover if the spouse is thesole beneficiary of the trust.

Distributions must be completed by theend of the fifth year following theparticipant’s death.

Possible spousal rollover if the spouse is thesole beneficiary of the estate.

Distributions can be made over thespouse’s single life expectancy recalculatedannually or, if longer, the owner’sremaining single life expectancy. At thespouse’s death, RMDs are made over thespouse’s remaining single life determinedin the year of death and reduced by onefor each year thereafter.

Rollover available.

RMDs over the beneficiary’s or, iflonger, the owner’s remaining single lifeexpectancy.

Rollover not available.

If the trust qualifies as a designatedbeneficiary, RMDs over the lifeexpectancy of the oldest beneficiary.

If the trust does not qualify as adesignated beneficiary, RMDs over theowner’s life expectancy.

Possible spousal rollover if the spouse isthe sole beneficiary of the trust.

RMDs over the owner’s life expectancy.

Possible spousal rollover if the spouse isthe sole beneficiary of the estate.

Beneficiary Designation* Participant Dies Before RBD 2 Participant Dies After RBD

1 RMD = Required Minimum Distribution2 RBD = Required Beginning Date* Designated beneficiaries are determined as of Sept. 30 of the year following the year of the owner’s death. Any beneficiary eliminated by distribution ofthe benefit, disclaimer or otherwise by this time is disregarded.


57

Joint/Survivor Annuity After 1997

Name: ____________________________________

Year: 2011

ELIGIBILITY REQUIREMENTS

A. Payout start date is AFTER Dec. 31, 1997.

B. Payments are for your life and that of your beneficiary.

C. Payments are from a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity, AND

D. When payments began, you were under 75 or entitled to less than 5 years of guaranteed

payments.

1. Total pension received in 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2. Your cost in the plan at annuity start date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3. Combined ages at annuity start date = Divisor (see below). . . . . . . . . 4. Divide line 2 by the divisor on line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ Number of monthly payments received in 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Multiply line 4 by number of payments in 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6. Cost recovered in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7. Subtract line 6 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8. Lesser of line 5 or line 7, but not more than line 1 . . . . . . . . . . . . . . . . . . . . . . . . . $ 9. Taxable pension for 2011. Subtract line 8 from line 1 . . . . . . . . . . . . . . . . . . . $ 10. Total cost recovered. Add line 6 and line 8 . . . . . . . . . . . . . . . . . . . . . . . . . $ 11. Remaining cost of pension to be recovered - subtract line 10 from line 2 . . . . . .$

Single Life Annuity Multiple Lives Annuity

Age at annuity Line 2 starting date amount 55 or under ................... 360 56 – 60 .......................... 310 61 – 65 .......................... 260 66 – 70 .......................... 210 71 or older .................... 160

Combined age at Line 2 starting date amount 110 and under ................... 410 111 - 120 .......................... 360 121 -130 .......................... 310 131 - 140 .......................... 260 141 and older .................. 210

Joint/survivor annuity after 1997

taxation of federal retirement benefits - 1105...

Documents