Professional Documents
Culture Documents
Important Reminders
Get forms and other information faster and easier by: Civil service annuity payments. If your annuity
COMPUTER starting date is after November 18, 1996, you cannot
• World Wide Web ➤ www.irs.ustreas.gov use the General Rule to figure your taxable annuity.
• FTP ➤ ftp.irs.ustreas.gov
• IRIS at FedWorld ➤ (703) 321-8020 Instead, you must use the Simplified Method. Also, the
FAX recovery factors (the number of anticipated monthly
• From your FAX machine, dial ➤ (703) 368-9694 payments) used to figure the tax-free portion of your
See How To Get More Information in this publication.
annuity under the Simplified Method have changed.
See Simplified Method in Part II of this publication.
Repeal of $5,000 death benefit exclusion. The ben-
eficiary of an employee who dies after August 20,
1996, cannot claim the $5,000 death benefit exclusion. Part I
See Rules for Survivors of Federal Employees in Part
IV.
General Information
This section contains information that can apply to most
recipients of civil service retirement benefits.
Exclusion limit. If your annuity starting date is after Table 1. Use Table 1, Simplified Method Worksheet,
1986, the total amount of annuity income that you (or (near the end of this publication) to figure your taxable
the survivor annuitant) can exclude over the years as annuity. Be sure to keep the completed worksheet; it
a return of your cost may not exceed your total cost. will help you figure your taxable amounts for later years.
Line 2. Your cost in the plan includes any deemed
Example. Your annuity starting date is after 1986 deposits or redeposits (explained later under Alternative
and you exclude $100 a month under the Simplified Annuity Option. ) If your annuity starting date was after
Method. If your cost is $12,000, the exclusion ends after November 18, 1996, and you chose the alternative an-
10 years (120 months). Thereafter, your entire annuity nuity option, reduce your cost by the lump-sum pay-
is taxable. ment you received.
Line 3. In completing line 3, use your age at your last
Annuity starting date before 1987. If your annuity birthday before your annuity starting date. If you re-
starting date was before 1987, you continue to take ceived your first annuity payment in 1997 but your an-
your monthly exclusion figured under the General Rule nuity starting date was before November 19, 1996, do
or Simplified Method for as long as you receive your not enter the amount shown for your age on the work-
annuity. If you chose a joint and survivor annuity, your sheet. Instead, enter:
survivor continues to take the survivor's exclusion fig-
ured as of the annuity starting date. The total exclusion
• 300, if you were 55 or under,
may be more than your cost. • 260, if you were 56 - 60,
Page 5
• 240, if you were 61 - 65, If Bill does not live to collect 260 monthly payments
and his wife begins to receive monthly payments, she
• 170, if you were 66 - 70,
will also exclude $95 from each monthly payment until
• 120, if you were 71 or older. 260 payments (Bill's and hers) have been collected. If
she dies before 260 payments have been made, a
Line 6. If you retired before 1997, the amount pre-
miscellaneous itemized deduction (not subject to the
viously recovered tax free that you must enter on line
2%-of-adjusted-gross-income limit) will be allowed for
6 is the total amount from line 10 of last year's work-
the unrecovered cost on her final income tax return.
sheet.
Example. Bill Kirkland, age 65, began receiving re-
tirement benefits in January 1997 under a joint and General Rule
survivor annuity to be paid for the joint lives of Bill and If your annuity starting date is before November 19,
his wife, Kathy. He had contributed $24,700 to the plan 1996, you could have chosen to use the General Rule
and had received no distributions before the annuity to figure the tax-free part of your CSRS or FERS an-
starting date. Bill is to receive a retirement benefit of nuity. If your annuity starting date is before July 2, 1986,
$1,000 a month, and Kathy is to receive a monthly you could have made that choice only if you could not
survivor benefit of $500 upon Bill's death. use the Three-Year Rule (explained later).
Bill must use the Simplified Method computa-
tion. He fills in the worksheet as follows: Compared with simplified method. If you are able
to use the Simplified Method (discussed above), it will
Table 1. Simplified Method Worksheet usually be easier to use than the General Rule. You
1. Enter the total annuity received this year. Also usually will pay less tax if you use it. The General Rule
add this amount to the total for Form 1040, line is not explained in this publication. If you want to com-
16a, or Form 1040A, line 11a ............................. $12,000 pare results using the two rules, get Publication 939.
2. Enter your cost in the plan at the annuity starting
date, plus any death benefit exclusion ............... 24,700
Three-Year Rule. If your annuity starting date was
NOTE: If you received annuity payments in prior before July 2, 1986, you probably had to report your
years, skip line 3 and enter the amount from line annuity using the Three-Year Rule. Under this rule, you
4 of last year's worksheet on line 4.
excluded all the annuity payments from income until
3. Age at annuity starting date: Enter: you fully recovered your cost. After the cost was re-
55 and under 360 covered, all payments became fully taxable. You cannot
56–60 310 use another rule to again exclude amounts from in-
61–65 260
come.
66–70 210
71 and over 160 260 The Three-Year Rule was repealed for retirees who
have an annuity starting date after July 1, 1986.
4. Divide line 2 by line 3 ......................................... 95
5. Multiply line 4 by the number of months for which
this year's payments were made ........................ 1,140 Alternative Annuity Option
NOTE: If your annuity starting date was before If you are a nondisability retiree under either the Civil
1987, enter the amount from line 5 on line 8 be- Service Retirement System (CSRS) or the Federal
low. Skip lines 6, 7, 10, and 11. Employees' Retirement System (FERS), you may be
6. Enter any amounts previously recovered tax free able to choose the alternative annuity option. This op-
in years after 1986 .............................................. 0 tion is generally available only to those with certain
7. Subtract line 6 from line 2 .................................. 24,700 life-threatening illnesses or other critical medical con-
8. Enter the smaller of line 5 or line 7 .................... 1,140 ditions. If you choose this option, you will receive a
9. Taxable annuity for year. Subtract line 8 from
lump-sum payment equal to your total regular contri-
line 1. Enter the result, but not less than zero.
Also add this amount to the total for Form 1040, butions to the retirement plan plus any interest that
line 16b, or Form 1040A, line 11b ...................... $10,860 applies. Your monthly annuity is then reduced by about
5 to 15 percent to adjust for this payment.
NOTE: If your Form CSA 1099R shows a larger
If you choose the alternative annuity option, the
amount, use the amount on line 9 instead.
amount of the lump-sum payment is usually fully taxa-
10. Add lines 6 and 8 ................................................ 1,140 ble. However, it may have a non-taxable part in some
11. Balance of cost to be recovered. Subtract line cases. The nontaxable part, if any, is that amount by
10 from line 2 ...................................................... $23,560 which the payment exceeds the income on the contract.
Bill's tax-free monthly amount is $95. (See line 4 of The income on the contract is equal to the present
the worksheet.) If he lives to collect more than 260 value of the annuity contract minus the contributions
monthly payments, he will have to include in his gross you made to the retirement system. To determine the
income the full amount of any annuity payments re- present value of the contract, call the IRS Actuarial
ceived after 260 payments have been made. Branch 3 at 202–622–7789 (not a toll-free call).
Page 6
You can figure the nontaxable part of a lump- The total that Fran can exclude over the years is
sum payment using the following worksheet. $21,780, which is made up of $1,851, the tax-free part
of her lump-sum credit, and $19,929, the tax-free part
1) Enter the total lump-sum payment ...................... $ of her annuity payments.
2) Enter the present value of the contract ............... $ Rollovers. You can roll over the taxable part of the
3) Enter the investment in the retirement plan ........ $ lump-sum payment to an IRA or a qualified retirement
4) Income on the contract. Subtract line 3 from plan. OPM must withhold income tax of 20% on the
line 2 ................................................................... $ taxable part of the payment unless you have OPM
5) Nontaxable part of the lump-sum payment. transfer that part directly to an IRA or a qualified re-
Subtract line 4 from line 1. (If line 4 is more than tirement plan. See Rollover Rules later in this part for
line 1, enter -0-.) .................................................. $ more information.
If your contributions include a deemed deposit or
redeposit, discussed later, OPM will make a direct
Annuity starting date before November 19, 1996. If
rollover only up to the net lump-sum payment amount.
your annuity starting date was before November 19,
If the taxable amount (line 8 of Table 2, Worksheet for
1996, and you chose the alternative annuity option,
Lump-Sum Payment) is more than your net lump-sum
different rules apply. Under those rules, 85% to 95%
payment, you can roll over the difference using your
of the payment amount equal to your contributions to
own funds within 60 days. If you do not roll over this
the retirement system is taxable. Figure the taxable part
difference, you must include it as taxable income on
by using Table 2, Worksheet for Lump-Sum Payment,
your income tax return.
near the end of this publication. Your annuity payments
5– or 10–year tax option or capital gain treatment.
are partly taxable under either the Simplified Method
Your lump-sum payment does not qualify for the 5–
or the General Rule (as explained earlier).
or 10–year tax option or capital gain treatment. Do not
Example. Fran Brown retired from the federal gov- report any lump-sum payment or any interest on Form
ernment on November 9, 1996, at age 55. She was 4972, Tax on Lump-Sum Distributions. This form is
entitled to a regular annuity (without survivor benefit) used to elect these optional methods. For more infor-
of $1,000 a month if she did not choose the alternative mation, get Publication 575.
annuity option. Her annuity cost (the total of her con- Where to report. As stated on the worksheet, add
tributions to the plan) was $21,780. Accrued interest any actual or deemed payment of your lump-sum credit
on these contributions totaled $220. to the total for line 16a, Form 1040, or line 11a, Form
Upon her retirement, Fran elected the alternative 1040A. Add the taxable portion to the total for line 16b,
annuity option, reducing her monthly annuity to $915. Form 1040, or line 11b, Form 1040A, unless you roll
In 1997, she received the lump-sum payment of over the taxable portion to an IRA or a qualified retire-
$22,000, which equaled her contributions plus the in- ment plan. Include any interest paid with the second
terest that applied. installment on line 8a.
Additional tax. If you retired before the calendar
She figures the taxable part of her lump-sum year in which you reach age 55, you must pay an ad-
payment as follows: ditional tax equal to 10% of the taxable amount of the
lump-sum payment that you do not roll over to an IRA
Table 2. Worksheet for Lump-Sum Payment or a qualified retirement plan. Report the additional tax
1) Largest original monthly annuity payment
on line 50, Form 1040. You may also have to complete
available (after the reduction for a survivor Form 5329, Additional Taxes Attributable to Qualified
benefit, if applicable) ........................................ $ 1,000 Retirement Plans (Including IRAs), Annuities, Modified
2) Monthly annuity payment after election of Endowment Contracts, and MSAs and attach it to your
lump-sum payment .......................................... 915 Form 1040. If you do not have to attach Form 5329,
3) Annuity reduction (subtract line 2 from line 1) . 85 write “No” on the dotted line next to line 50 of your Form
4) Lump-sum credit (contributions plus interest 1040.
plus deemed deposits or redeposits). Also in- The 10% additional tax does not apply to the taxable
clude the result in the total for line 16a, Form amount of the lump-sum payment that is equal to your
1040, or line 11a, Form 1040A ....................... 22,000
5) The amount on line 4 minus interest ............... 21,780
deductible medical expenses for the year (after re-
6) Divide line 3 by line 1 (round to 3 decimal duction by 71/2% of your adjusted gross income), even
places) ............................................................. .085 if you do not itemize deductions.
7) Tax-free portion of lump-sum payment (multi-
ply line 5 by line 6) .......................................... $ 1,851
8) Taxable portion of lump-sum credit (subtract Deemed deposits and redeposits. Your lump-sum
line 7 from line 4). Also include the result in the credit is the sum of your contributions to the retirement
total for line 16b, Form 1040, or line 11b, Form system, interest on those contributions, and any
1040A ............................................................... $ 20,149 deemed deposits and deemed redeposits. Deemed
deposits (including interest) are for federal employment
In figuring the taxable part of her annuity payments, during which no retirement contributions were taken out
Fran must use the Simplified Method. Under this rule, of your pay. Deemed redeposits (including interest) are
she divides her total cost ($21,780) by the number (360) for any refunds of retirement contributions that you re-
for her age at her annuity starting date from line 3 of ceived but have not repaid. You will get credit for this
Table 1. The result, $60.50, is her monthly tax-free prior service without actually making these deposits or
amount. redeposits. Your reduced (alternative) annuity will be
Page 7
figured as though, before retirement, you had made Federal Gift Tax
these deposits and redeposits to OPM. The lump-sum
payment actually made to you will not include these If, through the exercise or nonexercise of an election
amounts. or option, you provide an annuity for your beneficiary
at or after your death, you have made a gift. The gift
may be taxable for gift tax purposes. The value of the
Lump-sum payment in installments. If you choose gift is equal to the value of the annuity.
the alternative annuity option, you usually will receive
the lump-sum payment in two equal installments. You
will receive the first installment after you make the Joint and survivor annuity. If the gift is an interest in
choice upon retirement. The second installment will be a joint and survivor annuity where only you and your
paid to you, with interest, in the next calendar year. spouse can receive payments before the death of the
(Exceptions to the installment rule are provided for last spouse to die, the gift will generally qualify for the
cases of critical medical need.) unlimited marital deduction. This will eliminate any gift
Even though the lump-sum payment is made in in- tax liability with regard to that gift.
stallments, the overall tax treatment (explained at the If you provide survivor annuity benefits for someone
beginning of this discussion) is the same as if the whole other than your current spouse, such as your former
payment were paid at once. spouse, the unlimited marital deduction will not apply.
This may result in a taxable gift.
If the payment has a nontaxable part, you must
treat the taxable part (the income on the con- More information. For information about the gift tax,
tract) as received first. (See the earlier dis- see Publication 950, Introduction to Estate and Gift
cussion for computation of the taxable and nontaxable Taxes.
parts.) You can figure the nontaxable part of each in-
stallment using the following worksheet.
1) Enter the nontaxable part of the lump-sum pay-
Retirement During the Past Year
ment ..................................................................... $ If you have recently retired, the following discussions
2) Enter the first installment ..................................... $ covering annual leave, voluntary contributions, and
3) Enter the income on the contract ........................ $ community property may apply to you.
4) Nontaxable part of the first installment. Sub-
tract line 3 from line 2. (If line 3 is more than line
2, enter -0-.) ......................................................... $
Annual leave. Treat a payment for accrued annual
5) Nontaxable part of the second installment. leave received on retirement as a salary payment. It is
Subtract line 4 from line 1. .................................. $ taxable as wages in the tax year you receive it.
Annuity starting date before November 19, 1996.
In this case, the tax-free percentage of each installment Voluntary contributions. Voluntary contributions to
is the same as would apply to the lump-sum payment the retirement fund are those made in addition to the
as a whole. The tax-free amount of the first installment regular contributions that were deducted from your
is 50% of the tax-free portion on line 7 of your Work- salary. They also include the regular contributions
sheet for Lump-Sum Payment. Likewise, the tax-free withheld from your salary after you have the years of
amount of the second installment is 50% of the amount service necessary for the maximum annuity allowed by
on line 7. The balance of each installment payment is law. Voluntary contributions are not the same as em-
taxable, including the interest on the second install- ployee contributions to the Thrift Savings Plan. See
ment. Thrift Savings Plan, later.
If you have deemed deposits or deemed redeposits Additional annuity benefit. If you choose an addi-
(discussed earlier), your lump-sum payment is reduced. tional annuity benefit from your voluntary contributions,
This will affect the tax-free amount of each installment, it is treated separately from the annuity benefit that
as shown in the following example. comes from the regular contributions deducted from
your salary. This separate treatment applies for figuring
Example. Your unadjusted lump-sum credit was the amounts to be excluded from, and included in, gross
$20,000. Your payment, however, was reduced by a income. It does not matter that you receive only one
$2,000 deemed redeposit of contributions that had been monthly check covering both benefits. Each year you
previously refunded to you. You were therefore entitled will receive Form CSA 1099R, Statement of Annuity
to an $18,000 lump-sum payment. Half of this, or Paid, that will show how much of your total annuity re-
$9,000, was paid to you as the first installment. The ceived in the past year was from each type of benefit.
remaining $9,000 was paid in the second installment. Figure the taxable and tax-free parts of your addi-
You are considered to have received the $2,000 re- tional monthly benefits from voluntary contributions us-
deposit with the first installment, making a total of ing the rules that apply to regular CSRS and FERS
$11,000 ($9,000 plus $2,000). This is 55% of the total annuities, as explained earlier in Part II.
$20,000 lump-sum credit (instead of 50%). Apply this Refund of voluntary contributions. If you choose
55% to the tax-free amount of the total lump-sum credit a refund of your voluntary contributions plus accrued
(from line 7 of your Worksheet for Lump-Sum interest, the interest is taxable to you in the tax year it
Payment). The result is the tax-free part of the first in- is distributed unless you roll it over to an IRA or a
stallment. The remaining 45% of the tax-free amount qualified retirement plan. See Rollover Rules, later. The
of the total lump-sum credit is the tax-free part of the interest does not qualify for the 5– or 10–year tax op-
second installment. tion.
Page 8
Example. You retired in November when you receive while you are reemployed is generally fully
reached the necessary age and years of service to re- taxable. The employing agency will pay you the differ-
tire. You applied for an annuity based on your regular ence between your salary for your period of reemploy-
contributions to the plan. You chose a refund of your ment and your annuity. This amount is taxable as
voluntary contributions plus interest. wages.
On December 15, you received the refund. The in-
terest is fully taxable (no 5– or 10–year tax option Nonresident Aliens
treatment is allowed) unless you roll it over to an IRA
or a qualified retirement plan within 60 days. There are some special rules for nonresident alien
federal employees performing services outside the
Additional tax. The accrued interest included in the United States and for nonresident alien retirees and
refund of voluntary contributions and not rolled over into beneficiaries.
an IRA or a qualified retirement plan is generally subject
to a 10% additional tax on early distributions if the re- Special rule for figuring your total contributions.
fund is made to you before the date you reach age Your contributions to the retirement plan (your cost)
591/2. However, the tax does not apply if the refund is also include the government's contributions to the plan
made after your retirement and you retired during or to a certain extent. You include government contribu-
after the calendar year in which you reached age 55. tions that would not have been taxable to you at the
Also, the 10% additional tax does not apply if you time they were contributed if they had been paid directly
retired at any age because of total and permanent dis- to you. For example, government contributions would
ability. Nor does the additional tax apply to the accrued not have been taxable to you if, at the time made, your
interest that is equal to your deductible medical ex- services were performed outside the United States.
penses for the year (after reduction by 71/2% of your Thus, your cost is increased by government contribu-
adjusted gross income), even if you do not itemize de- tions that you would have excluded as income from
ductions. foreign services if you had received them directly as
Report the additional tax on line 50, Form 1040. You wages. This reduces the benefits that you, or your
may also have to complete Form 5329 and attach it to beneficiary, must include in income.
your Form 1040. If you do not have to attach Form This method of figuring your total contributions does
5329, write “No” on the dotted line next to line 50 of your not apply to any contributions the government made
Form 1040. on your behalf after you became a citizen or resident
of the United States.
Community property laws. State community property
laws apply to your annuity. This will affect your income Limit on taxable amount. There is a limit on the dis-
tax if you file a separate return from your spouse. tributions paid to a nonresident alien retiree or nonres-
Generally, the determination of whether your annuity ident alien beneficiary that must be included in income.
is separate income (taxable to you) or community in- The taxable part of each monthly payment is figured
come (taxable to both you and your spouse) is based using the following worksheet:
on your marital status and domicile when you were Worksheet for Nonresident Alien Retiree or Beneficiary
working. Regardless of whether you are now living in 1) Portion of monthly annuity otherwise taxable $
a community property state or a noncommunity property 2) Total basic pay for services for the United
state, your current annuity may be community income States ............................................................... $
if it is based on services you performed while married 3) Total basic pay minus part that was nontaxable
and domiciled in a community property state. as being from sources outside the United
At any time, you have only one domicile even though States ............................................................... $
you may have more than one home. Your domicile is 4) Taxable part of monthly annuity
[((3) ÷ (2)) × (1)] ............................................... $
your fixed and permanent legal home to which, when
absent, you intend to return. The question of your Basic pay. Basic pay includes your regular pay plus
domicile is mainly a matter of your intentions as indi- any standby differential. It does not include bonuses,
cated by your actions. overtime pay, certain retroactive pay, uniform or other
If your annuity is a mixture of community income and allowances, or lump-sum leave payments.
separate income, you must divide it between the two
Example 1. You are a nonresident alien who had
kinds of income. The division is based on your periods
performed all services for the United States abroad as
of service and domicile in community and noncommu-
a nonresident alien. You retired and began to receive
nity property states while you were married.
a monthly annuity of $200. Your combined basic pay
For more information, see Publication 555, Commu-
for all services for the United States was $100,000.
nity Property.
Without regard to the limit explained above, you
would have had to include $60 of each monthly annuity
Reemployment After Retirement payment in your gross income. Since you are a non-
If you retired from federal service and were later re- resident alien, the taxable part of each monthly pay-
employed by the federal government, you can continue ment after use of the limit is figured as follows:
to receive your annuity during reemployment. Your an- Worksheet for Nonresident Alien Retiree or Beneficiary
nuity will continue to be taxed just as it was before. If 1) Portion of monthly annuity otherwise taxable $ 60
you are still recovering your cost, you continue to do 2) Total basic pay for services for the United
so. If you have recovered your cost, the annuity you States ............................................................... $ 100,000
Page 9
3) Total basic pay minus part that was nontaxable If you receive a single payment or payments over a
as being from sources outside the United period of less than 10 years, the TSP must withhold
States ............................................................... $ 0 20% for federal income tax. If you receive payments
4) Taxable part of monthly annuity over a period of 10 or more years or a period based
[((3) ÷ (2)) × (1)]
[($0 ÷ $100,000) × $60] ................................... $ 0 on your life expectancy, they are subject to withholding
under the same rules as your CSRS or FERS annuity.
See Tax Withholding and Estimated Tax in Part I.
Example 2. You are a nonresident alien who retired Tax on early distributions. If you separate from
from your employment with the United States. For your government service before the calendar year in which
work performed both within the United States and your reach age 55, any money paid to you from your
abroad you began to receive a monthly annuity of $240. TSP account before you reach age 591/2 is generally
Your total basic pay for your services for the United subject to an additional 10% tax on early distributions.
States was $120,000; $80,000 was for work done in the Report the tax on line 50 of Form 1040. You may also
United States, and $40,000 was for your work done in have to file Form 5329. For details, see the Form 1040
a foreign country. You were a nonresident alien during instructions for line 50.
all of your employment. This additional tax does not apply in the following
Under the rules that would otherwise apply to your situations:
annuity, you would have had to include $165 of each
monthly payment in your gross income. Applying the 1) You receive a series of payments based on your life
limit based on your present rate of annuity the taxable expectancy, or
part of each monthly payment is figured as follows:
2) You retire on disability.
Worksheet for Nonresident Alien Retiree or Beneficiary
1) Portion of monthly annuity otherwise taxable $ 165
2) Total basic pay for services for the United Also, this tax does not apply to the amount of pay-
States ............................................................... $ 120,000 ments you receive equal to your medical expenses for
3) Total basic pay minus part that was nontaxable the year, minus 7.5% of your adjusted gross income.
as being from sources outside the United
States. Outstanding loan. If the TSP declares a distribution
($120,000 − $40,000) ...................................... $ 80,000
4) Taxable part of monthly annuity
from your account because money you borrowed has
[((3) ÷ (2)) × (1)] not been repaid when you separate from government
[($80,000 ÷ $120,000) × $165] ........................ $ 110 service, your account is reduced and the amount of the
distribution (your unpaid loan balance and any unpaid
interest) is taxed in the year declared. The distribution
Thrift Savings Plan also may be subject to the additional 10% tax on early
distributions. However, the tax will be deferred if you
All of the money in your Thrift Savings Plan (TSP) ac- make a rollover contribution to an IRA or other qualified
count is taxed as ordinary income when you receive it. plan equal to the declared distribution amount. See
This is because neither the contributions to your TSP Rollover Rules, next. If you withdraw any money from
account nor its earnings have been previously included your TSP account the same year, the TSP must with-
in your taxable income. The way that you withdraw your hold income tax of 20% of the total of the declared
account balance determines when you must pay the distribution and the amount withdrawn.
tax.
More information. For more information about the
Direct rollover by the TSP. If you ask the TSP to TSP, see Summary of the Thrift Savings Plan for Fed-
transfer any part of the money in your account to an eral Employees, distributed to all federal employees.
individual retirement arrangement (IRA) or other qual- Also see Important Tax Information About Payments
ified retirement plan, the tax on that part is deferred until From Your Thrift Savings Plan Account, which is avail-
you receive payments from the IRA or other plan. See able from your agency personnel office or from the TSP.
Rollover Rules, later.
Rollover Rules
TSP annuity. If you ask the TSP to buy an annuity with A rollover is a tax-free withdrawal of cash or other as-
the money in your account, the annuity payments are sets from one qualified retirement plan or IRA and its
taxed when you receive them. However, the payments reinvestment in another qualified retirement plan or IRA.
are not subject to the tax on early distributions, even if You do not include the amount rolled over in your in-
you are under age 55 when they begin. come, and you cannot take a deduction for it. The
amount rolled over is taxable later as the new program
Cash withdrawals. If you withdraw any of the money pays that amount to you. If you roll over amounts into
in your TSP account, it is taxed as ordinary income an IRA, subsequent distributions of these amounts from
when you receive it unless you roll it over into an IRA the IRA do not qualify for the capital gain or the 5– or
or other qualified plan. (See Rollover Rules, later.) If 10–year tax option. Capital gain treatment or the 5– or
you receive your entire TSP account balance in a single 10–year tax option will be regained if the IRA contains
tax year, you may be able to use the 5– or 10–year tax only amounts rolled over from a qualified plan and these
option to figure your tax. See Lump-Sum Distributions amounts are rolled over from the IRA into a qualified
in Publication 575 for details. retirement plan.
Page 10
A qualified retirement plan is a qualified pension, in Publication 575. If you roll over any part of the dis-
profit-sharing, or stock bonus plan, or a qualified an- tribution, the part you keep does not qualify for this
nuity plan. The CSRS, the FERS, and the TSP are special tax treatment.
considered qualified retirement plans. Rolling over more than amount received. If you
want to roll over more of an eligible rollover distribution
Distributions eligible for rollover treatment. If you than the amount you received after income tax was
receive a refund of your CSRS or FERS contributions withheld, you will have to add funds from some other
when you leave government service, you can roll over source (such as your savings or borrowed amounts).
any interest you receive on the contributions. You can-
Example. You left government service at age 53.
not roll over any part of your CSRS or FERS annuity
On January 31, 1998, you receive an eligible rollover
payments.
distribution of $10,000 from your TSP account. The
You can roll over a distribution of any part of your
TSP withholds $2,000, so you actually receive $8,000.
TSP account balance except:
If you want to roll over the entire $10,000 to postpone
1) Any of a series of substantially equal distributions including that amount in your income, you will have to
paid at least once a year over: get $2,000 from some other source and add it to the
$8,000 you actually received. You must complete the
a) Your life or life expectancy, rollover by April 1, 1998.
If you roll over only $8,000, you must include in your
b) The joint lives or life expectancies of you and
1998 income the $2,000 not rolled over. Also, you may
your beneficiary, or
be subject to the 10% additional tax on the $2,000.
c) A period of 10 years or more,
Time for making rollover. You must complete the
2) A required minimum distribution generally begin-
rollover of an eligible rollover distribution by the 60th
ning at age 701/2, or
day following the day on which you receive the distri-
3) A declared distribution because of an unrepaid bution.
loan, if you have not separated from government Frozen deposits. If an amount that was distributed
service (see Outstanding Loan under Thrift Savings to you is deposited in an account from which you cannot
Plan, earlier). withdraw it because of either:
In addition, a distribution to your beneficiary gener- 1) The bankruptcy or insolvency of any financial insti-
ally is not treated as an eligible rollover distribution. tution, or
However, see Qualified domestic relations order and 2) Any requirement imposed by the state in which the
Rollover by surviving spouse, later. institution is located because of the bankruptcy or
insolvency (or threat of it) of one or more financial
Direct rollover option. You can choose to have the institutions in the state,
OPM or TSP transfer any part of an eligible rollover
distribution directly to another qualified retirement plan that amount is considered a “frozen deposit” for the
that accepts rollover distributions or to an IRA. period during which you cannot withdraw it.
No tax withheld. If you choose the direct rollover A special rule extends the period allowed for a tax-
option, no tax will be withheld from any part of the dis- free rollover for frozen deposits. The period during
tribution that is directly paid to the trustee of the other which the amount is a frozen deposit is not counted in
plan. the 60–day period allowed for a tax-free rollover to a
qualified plan or an IRA. Also, the 60–day period does
Payment to you option. If an eligible rollover distri- not end earlier than 10 days after the deposit is no
bution is paid to you, the OPM or TSP must withhold longer a frozen deposit. To qualify under this rule, the
20% for income tax even if you plan to roll over the deposit must be frozen on at least one day during the
distribution to another qualified retirement plan or IRA. 60–day rollover period.
However, the full amount is treated as distributed to you
even though you actually receive only 80%. You must Qualified domestic relations order. You may be able
include in income any part (including the part withheld) to roll over tax free all or part of a distribution you re-
that you do not roll over within 60 days to another ceive from the CSRS, the FERS, or the TSP under a
qualified retirement plan or to an IRA. court order in a divorce or similar proceeding. You must
If you leave government service before the calendar receive the distribution as the government employee's
year in which you reach age 55 and are under age spouse or former spouse (not as a nonspousal benefi-
591/2 when a distribution is paid to you, you may have ciary). The rollover rules apply to you as if you were the
to pay an additional 10% tax on any part, including any employee. You can roll over the distribution if it is an
tax withheld, that you do not roll over. See Tax on Early eligible rollover distribution (described earlier) and it is
Distributions in Publication 575. made under a qualified domestic relations order
Exception to withholding. Withholding from an el- (QDRO) or, for the TSP, a qualifying order.
igible rollover distribution paid to you is not required if A QDRO is a judgment, decree, or order relating to
the distributions for your tax year total less than $200. payment of child support, alimony, or marital property
Partial rollovers. If you receive a lump-sum distri- rights. The payments must be made to a spouse, former
bution, it may qualify for capital gain treatment or the spouse, child, or other dependent of a participant in the
5– or 10–year tax option. See Lump-Sum Distributions plan. For the TSP, a QDRO can be a qualifying order,
Page 11
but a domestic relations order can be a qualifying order is provided as long as the following two requirements
even if it is not a QDRO. For example, a qualifying order are met.
can include an order that requires a TSP payment of
attorney's fees to the attorney for the spouse, former
1) You must have the opportunity to consider whether
spouse, or child of the participant.
or not you want to make a direct rollover for at least
The order must contain certain information, including
30 days after the explanation is provided.
the amount or percentage of the participant's benefits
to be paid to each payee. It cannot change the amount
2) The information you receive must clearly state that
or form of the plan's benefits.
you have the right to have 30 days to make a de-
A distribution that is paid to a child, dependent, or,
cision.
if applicable, an attorney for fees, under a QDRO or a
qualifying order is taxed to the plan participant.
Contact the TSP or OPM if you have any questions
about this information.
Rollover by surviving spouse. You may be able to
roll over tax free all or part of the CSRS, FERS, or TSP
distribution you receive as the surviving spouse of a Choosing the right option. The following comparison
deceased employee. The rollover rules apply to you as chart may help you decide which distribution option to
if you were the employee, except that you can roll over choose. Carefully compare the tax effects of each and
the distribution only into an IRA. You cannot roll it over choose the option that is best for you.
into a qualified retirement plan. A distribution paid to a
beneficiary other than the employee's surviving spouse Comparison Chart
is not an eligible rollover distribution.
Direct Rollover Payment To You
You cannot roll over into an IRA any part of the dis-
tribution to which you apply the death benefit exclusion. No withholding. Payer must withhold income tax of 20%
on the taxable part even if you roll it
over to another plan or to an IRA.
How to report. On your Form 1040, report the total No 10% additional If you are under age 591/2, a 10% ad-
distributions from the CSRS, FERS, or TSP on line 16a. tax. ditional tax may apply to the taxable
Report the taxable amount of the distributions minus the part, including the tax withheld, that you
amount rolled over, regardless of how the rollover was do not roll over.
made, on line 16b. If you file Form 1040A, report the Not income until Taxable part, including the tax withheld,
total distributions on line 11a and the taxable amount later distributed to is income if not rolled over.
minus the amount rolled over on line 11b. you from the other
plan or the IRA.
Not eligible for May be eligible for capital gain treat-
Written explanation to recipients. The TSP or OPM capital gain or ment or the 5– or 10–year tax option if
must provide a written explanation to you within a rea- 5– or 10–year no part is rolled over.
sonable period of time before making an eligible rollover tax option. *
distribution to you. It must tell you about: *May be eligible for capital gain treatment or the 5– or 10–year
tax option when later distributed to you from the plan that
accepts the rollover.
1) Your right to have the distribution paid tax free di-
rectly to another qualified retirement plan or to an
IRA,
How To Report Benefits
2) The requirement to withhold tax from the distribu-
If you received annuity benefits that are not fully taxa-
tion if it is not paid directly to another qualified re-
ble, report the total received for the year on Form 1040,
tirement plan or to an IRA,
line 16a, or on Form 1040A, line 11a. Also include on
that line the total of any other pension plan payments
3) The nontaxability of any part of the distribution that
(even if fully taxable, such as those from the Thrift
you roll over to another qualified retirement plan or
Savings Plan) that you received during the year in ad-
to an IRA within 60 days after you receive the dis-
dition to the annuity. Report the taxable amount of these
tribution, and
total benefits on line 16b (Form 1040) or line 11b (Form
1040A). If you use Form 4972, Tax on Lump-Sum Dis-
4) If they apply, the other qualified retirement plan
tributions, however, to report the tax on any amount,
rules, including those for lump-sum distributions,
do not include that amount on lines 16a and 16b or lines
alternate payees, and cash or deferred arrange-
11a and 11b; follow the Form 4972 instructions.
ments.
If you received only fully taxable payments from your
retirement, the Thrift Savings Plan, or other pension
Reasonable period of time. The TSP or OPM must plan, report on Form 1040, line 16b, or Form 1040A,
provide you with a written explanation no earlier than line 11b, the total received for the year (except for any
90 days and no later than 30 days before the distribu- amount reported on Form 4972); no entry is required
tion is made. However, you can choose to have a dis- on line 16a (Form 1040) or line 11a (Form 1040A).
tribution made less than 30 days after the explanation
Page 12
How to report. You must report all your disability
payments received before minimum retirement age on
Part III line 7 (Form 1040 or Form 1040A).
Rules for Disability
Withholding. For income tax withholding purposes, a
Retirement and disability annuity is treated the same as a nondisability
annuity. This treatment also applies to disability pay-
Credit for the Elderly or ments received before minimum retirement age when
the Disabled these payments are shown as wages on your return.
See Tax Withholding and Estimated Tax in Part I, ear-
If you retired on disability from the CSRS or FERS, the lier.
disability pension you receive is taxable as wages until
you reach minimum retirement age. Beginning on the
day after you reach minimum retirement age, your Credit for the Elderly or the Disabled
payments are treated as a retirement annuity. At that You may be able to take the credit for the elderly or the
time or at any time thereafter, you can begin to recover disabled if:
the cost of your annuity under the rules discussed in
Part II. 1) You were age 65 or older at the end of the tax year,
If you find that you could have started your recovery or
in an earlier year for which you have already filed a 2) You were under age 65 at the end of the tax year
return, you can elect to start your recovery of contribu- and you meet all of the following tests:
tions in that earlier year by filing an amended return for
that year and each succeeding year. Generally, an a) You are retired on permanent and total disabil-
amended return for any year must be filed within 3 ity,
years after the due date for filing your original return for
that year. b) You received taxable disability income in the tax
year, and
Minimum retirement age (MRA). This is the age at c) You did not reach mandatory retirement age
which you could first receive an annuity were you not (explained later) before the beginning of the tax
disabled. This is generally based on your age and year.
length of service.
Retirement under the Civil Service Retirement You are retired on permanent and total disability if
System (CSRS). In most cases, under the CSRS, the you were permanently and totally disabled when you
minimum combinations of age and service for retire- retired and you retired on disability before the close of
ment are: the tax year. If you retired on disability before 1977 but
you were not permanently and totally disabled at the
time you retired, you can qualify for the credit if you
• Age 55 with 30 years of service,
were permanently and totally disabled on January 1,
• Age 60 with 20 years of service, 1976, or January 1, 1977.
• Age 62 with 5 years of service, and
Permanently and totally disabled. You are perma-
• For law enforcement, firefighter, or air traffic con- nently and totally disabled if you cannot engage in any
troller service, age 50 with 20 years of covered substantial gainful activity because of your physical
service. or mental condition. A physician must certify that your
condition is expected to result in death or has lasted,
Retirement under the Federal Employees Retire- or can be expected to last, continuously for 12 months
ment System (FERS). Your MRA under the FERS is or more. Substantial gainful activity is the performance
between 55 and 57 with at least 10 years of service. of significant duties over a reasonable period of time
With at least 5 years of service, your MRA cannot be while working for pay or profit, or in work generally done
greater than age 62. Specifically, your MRA with at least for pay or profit.
10 years of service is shown in the following table: For further information, see Substantial gainful ac-
If you were born in Your MRA is
tivity in Publication 524, Credit for the Elderly or the
Disabled.
1947 or earlier ....................... 55 years
1948 ....................................... 55 years, 2 months
1949 ....................................... 55 years, 4 months
Mandatory retirement age. This is the age set by your
1950 ....................................... 55 years, 6 months employer at which you must retire. There is no man-
1951 ....................................... 55 years, 8 months datory retirement age for most federal employees.
1952 ....................................... 55 years, 10 months However, there is a mandatory retirement age for the
1953 to 1964 ......................... 56 years following employees.
1965 ....................................... 56 years, 2 months
1966 ....................................... 56 years, 4 months 1) An air traffic controller appointed after May 15,
1967 ....................................... 56 years, 6 months 1972, by the Department of Transportation or the
1968 ....................................... 56 years, 8 months Department of Defense generally must retire by the
1969 ....................................... 56 years, 10 months last day of the month in which he or she reaches
1970 or later .......................... 57 years
age 56.
Page 13
2) A firefighter employed by the U.S. Government who 2%-of-adjusted-gross-income limit. It is considered a
is otherwise eligible for immediate retirement gen- business loss and may create a net operating loss if it
erally must retire on the last day of the month in reduces your taxable income to zero. Get Publication
which he or she reaches age 55 or, if later, com- 536, Net Operating Losses, for more information. The
pletes 20 years of firefighter service. repayment is not eligible for the special tax credit that
applies to repayments over $3,000 of amounts received
3) A law enforcement officer employed by the the U.S. under a claim of right.
Government who is otherwise eligible for immediate If you repay sick leave or disability payments in the
retirement generally must retire on the last day of same year you receive them, the repayment reduces
the month in which he or she reaches age 57 or, if the taxable sick pay or disability benefits you include in
later, completes 20 years of law enforcement ser- income. Do not deduct it separately.
vice.
Terrorist attack. Disability benefits you receive for in-
Physician's statement. If you are under 65, have your juries resulting from a violent attack are tax exempt and
doctor complete a statement certifying that you are are not treated as disability income or annuities if (1)
permanently and totally disabled. Attach the statement the Secretary of State determines it to be a terrorist
to your return. You can use the Physician's Statement attack, and (2) the attack took place while you were a
in Part II of either Schedule R (Form 1040) or Schedule federal employee performing official duties outside the
3 (Form 1040A). However, check the box in Part II and United States.
do not attach a physician's statement if:
1) You filed a physician's statement for the same dis- Disability resulting from military service injuries.
ability with your return for 1983 or an earlier year If you received tax-exempt benefits from the Depart-
or you filed a statement for tax years after 1983 and ment of Veterans Affairs for personal injuries resulting
your physician signed line B on the statement, and from active service in the armed forces and later receive
CSRS or FERS disability payments for disability arising
from the same injuries, you cannot treat the disability
2) Due to your continued disabling condition, you were payments as tax-exempt income. They are treated as
unable to engage in any substantial gainful activity a disability pension or annuity subject to the rules de-
in the tax year. scribed earlier.
If you have not filed a physician's statement in a previ- Payment for annual leave. When you retire, any
ous year, or if your statement did not meet the condi- payment for your unused annual leave is taxed as a
tions in (1) above, you must have your physician com- salary payment. It is not treated as disability or annuity
plete a statement. pay, but is taxed as wages in the tax year you receive
the payment.
Figuring the credit. If you want the Internal Revenue
Service to figure your tax and credits, including the
credit for the elderly or the disabled, see Publication
967 and the instructions for Schedule R (Form 1040) Part IV
or Schedule 3 (Form 1040A).
For detailed information about this credit, get Publi- Rules for Survivors
cation 524. of Federal Employees
Salary or wages earned by a federal employee but paid
Other Benefits to the employee's survivor or beneficiary after the em-
The tax treatment of certain other benefits is explained ployee's death are “income in respect of the
in this section. decedent.” This income is taxable to the survivor or
beneficiary. This treatment also applies to payments for
Federal Employees' Compensation Act (FECA). accrued annual leave.
FECA payments you receive for personal injuries or
sickness resulting from the performance of your duties Dependents of public safety officers. The death
are like workers' compensation. They are tax exempt benefit payable to surviving dependents of public safety
and are not treated as disability income or annuities. officers (law enforcement officers or firefighters) who
However, payments you receive while your claim is die in the performance of duty is not taxable. The ben-
being processed, including pay while on sick leave and efit applies to public safety officers who died from inju-
“continuation of pay” for up to 45 days, are taxable. ries sustained after September 28, 1976, and is ad-
Sick pay or disability payments repaid. If you ministered through the Bureau of Justice Assistance.
repay sick leave or disability payments you received in The Bureau may pay the surviving dependents a
an earlier year to be eligible for nontaxable FECA temporary benefit up to $3,000 if it finds that the death
benefits, you can deduct the amount you repay. You of a public safety officer is one for which a final benefit
can claim the deduction whether you repay the amount will probably be paid. If there is no final payment, the
yourself or have the FECA payment sent directly to your recipient of the temporary benefit is liable for repay-
employing agency or the OPM. ment. However, the Bureau may not require all or part
Claim the deduction on Schedule A (Form 1040) as of the repayment if it will cause a hardship. If that hap-
a miscellaneous itemized deduction, subject to the pens, that amount is tax free.
Page 14
The death benefit is not includible in the decedent's proportion that the expected return from each an-
gross estate for federal estate tax purposes. nuity bears to the total expected return from both
annuities. Divide the amount allocated to the 3–year
Death Benefit Exclusion annuity by 36. The result is the tax-free part of each
monthly payment of the 3–year annuity.
You can exclude from income up to $5,000 paid to you
as beneficiary of an employee or former employee be-
cause of his or her death. However, the exclusion does CSRS or FERS Survivor Annuity
not apply if the employee died after August 20, 1996. You must use the Simplified Method or the General
Rule to report your CSRS or FERS survivor annuity. If
The maximum total exclusion is $5,000 regardless your annuity starting date is after November 18, 1996,
of the number of employers paying death benefits or the you must use the Simplified Method. Your annuity
number of beneficiaries. If more than one person is starting date is the day after the date of the employee's
entitled to death benefits, they must allocate the $5,000 death.
exclusion among themselves in proportion to the rela- The General Rule is not discussed in detail in this
tive value of their benefits. publication. For information about it, see Publication
The exclusion applies to the benefits you receive 939.
from the CSRS and FERS. It also applies to benefits
you receive from the TSP if the employee's entire ac- Three-Year Rule. If your annuity starting date was
count balance is paid to the beneficiaries within the before July 2, 1986, you probably had to report your
same calendar year. See Thrift Savings Plan, later. annuity using the Three-Year Rule. Under this rule, you
The exclusion is treated as additional contributions excluded all the annuity payments from income until
by the employee. Add the amount of the allowable ex- you fully recovered your cost. After the cost was re-
clusion to the employee's unadjusted cost in figuring covered, all payments became fully taxable. You cannot
your tax-free benefits. use another rule to again exclude amounts from in-
come.
FERS Death Benefit The Three-Year Rule was repealed for survivors with
You are entitled to a special FERS death benefit if you an annuity starting date after July 1, 1986.
were the spouse of an active FERS employee who died
after at least 18 months of federal service. At your op- Surviving spouse with no children receiving annui-
tion, you can take the benefit in the form of a single ties. To use the Simplified Method, complete the
payment or in the form of a special annuity payable over worksheet (Table 1) discussed in Part II and printed
a 3-year period. near the end of the publication.
The tax treatment of the special death benefit de-
Example. Diane Greene, age 48, began receiving
pends on the option you choose and whether a FERS
a $1,500 monthly CSRS annuity in March 1997 upon
survivor annuity is also paid.
the death of her husband. Her husband was a federal
If you choose the single payment option, use the
employee when he died. She received 10 payments in
following rules:
1997. Her husband had contributed $36,000 to the re-
1) If a FERS survivor annuity is not paid, at least part tirement plan.
of the special death benefit is tax free. The tax-free Diane must use the Simplified Method. She fills
part is an amount equal to the employee's FERS out the worksheet in Table 1 as follows:
contributions (plus any allowable death benefit ex-
clusion allocated to that benefit).
Table 1. Simplified Method Worksheet
2) If a FERS survivor annuity is paid, all of the special 1. Enter the total annuity received this year. Also
death benefit is taxable. You cannot allocate any add this amount to the total for Form 1040, line
of the employee's FERS contributions (or any al- 16a, or Form 1040A, line 11a ............................. $15,000
lowable death benefit exclusion) to the special 2. Enter your cost in the plan at the annuity starting
death benefit. date, plus any death benefit exclusion ............... 36,000
NOTE: If you received annuity payments in prior
If you choose the 3–year annuity option, at least years, skip line 3 and enter the amount from line
part of each monthly payment is tax free. Use the fol- 4 of last year's worksheet on line 4.
lowing rules: 3. Age at annuity starting date: Enter:
55 and under 360
1) If a FERS survivor annuity is not paid, the tax-free 56–60 310
part of each monthly payment is an amount equal 61–65 260
to the employee's FERS contributions (plus any al- 66–70 210
lowable death benefit exclusion allocated to the 71 and over 160 360
special death benefit) divided by 36. 4. Divide line 2 by line 3 ......................................... 100
5. Multiply line 4 by the number of months for which
2) If a FERS survivor annuity is paid, allocate the
this year's payments were made ........................ 1,000
employee's FERS contributions (plus any allowable
death benefit exclusion allocated to the FERS NOTE: If your annuity starting date was before
benefits) between the 3–year annuity and the sur- 1987, enter the amount from line 5 on line 8 be-
low. Skip lines 6, 7, 10, and 11.
vivor annuity. Make the allocation in the same
Page 15
6. Enter any amounts previously recovered tax free uses on line 3 the 360 factor for her age. After arriving
in years after 1986 .............................................. 0 at the $100 monthly exclusion on line 4, however, Diane
7. Subtract line 6 from line 2 .................................. 36,000 allocates it between her own annuity and that of her
8. Enter the smaller of line 5 or line 7 .................... 1,000 son.
9. Taxable annuity for year. Subtract line 8 from
line 1. Enter the result, but not less than zero. To find how much of the monthly exclusion to allo-
Also add this amount to the total for Form 1040, cate to her own annuity, Diane multiplies the $100
line 16b, or Form 1040A, line 11b ...................... $14,000 monthly exclusion by the fraction $1,500 (her monthly
annuity) over $2,000 (the total of her $1,500 and
NOTE: If your Form CSA 1099R shows a larger
amount, use the amount on line 9 instead. David's $500 annuities). She enters the result, $75, just
below the entry space for line 4. She completes the
10. Add lines 6 and 8 ................................................ 1,000 worksheet by entering $750 on lines 5 and 8 and
11. Balance of cost to be recovered. Subtract line $14,250 on line 9.
10 from line 2 ...................................................... $35,000
A second worksheet should be completed for David's
Diane keeps a copy of the completed worksheet for annuity. On line 1, he enters $5,000 as the total annuity
her records. It will help her figure her taxable annuity received. Lines 2, 3, and 4 are the same as those on
in later years. Diane's tax-free monthly amount is $100 his mother's worksheet. In allocating the $100 monthly
(line 4 of the worksheet). If she lives to collect more exclusion on line 4 to his annuity, David multiplies it by
than 360 payments, the payments after the 360th will the fraction $500 over $2,000. His resulting monthly
be fully taxable. exclusion is $25. His exclusion for the year (line 8) is
$250 and his taxable pension for the year (line 9) is
Surviving spouse with child. If the survivor benefits $4,750.
include both a life annuity for the surviving spouse and Diane and David only need to complete lines 10 and
one or more temporary annuities for the employee's 11 on a single worksheet to keep track of their unre-
children, an additional step is needed under the Sim- covered cost for next year. These lines are exactly as
plified Method to allocate the monthly exclusion among shown in the earlier example.
the beneficiaries correctly. When David stops getting his temporary annuity at
Figure the total monthly exclusion for all beneficiaries age 18 (or age 22, if applicable), the computation of the
by completing lines 2 through 4 of the worksheet in total monthly exclusion will not change. The only dif-
Table 1 as if only the oldest beneficiary (usually the ference will be that Diane will then claim the full exclu-
surviving spouse) received an annuity. Then, to figure sion against her annuity alone.
the monthly exclusion for each beneficiary, multiply line
4 of the worksheet by a fraction. For any beneficiary,
the numerator of the fraction is that beneficiary's Annuity for a surviving child only. A method similar
monthly annuity, and the denominator of the fraction is to the Simplified Method also can be used to report the
the total of the monthly annuity payments to all the taxable and nontaxable parts of a temporary annuity (or
beneficiaries. annuities) for one or more surviving children when there
Child's temporary annuity. Each surviving child is no surviving spouse annuity. To use this method,
will receive a temporary annuity until the child reaches divide the deceased employee's cost plus any death
age 18, marries, or dies, whichever comes first. There benefit exclusion by the number of months from the
are two exceptions to this. If the child is a full-time stu- child's annuity starting date until the date the child will
dent after reaching age 18, the annuity will continue reach age 22. The result is the monthly exclusion. (But
until the child stops being a student, reaches age 22, the monthly exclusion cannot be more than the monthly
marries, or dies, whichever occurs first. If the child is annuity payment. You can carry over unused exclusion
incapable of self-support after age 18 due to a medical amounts to apply against future annuity payments.) If
condition that began before age 18, the annuity will the surviving child is entitled to a temporary annuity
continue until the child becomes capable of self- regardless of age because he or she is disabled, see
support, marries, or dies. Disabled child, below.
The ending of a child's temporary annuity does not More than one child. If there is more than one child
affect the total monthly exclusion figured under the entitled to a temporary annuity (and no surviving
Simplified Method. The total exclusion merely needs to spouse annuity), divide the cost plus any death benefit
be reallocated at that time among the remaining bene- exclusion by the number of months of payments until
ficiaries. If only the surviving spouse is left drawing an the date the youngest child will reach age 22. This
annuity, the surviving spouse is entitled to the entire monthly exclusion must then be allocated among the
monthly exclusion as figured in the worksheet. children in proportion to their monthly annuity pay-
ments, like the exclusion shown in the previous exam-
Example. Assume the same facts as in the Diane ple.
Greene example, above, except that the Greenes had Disabled child. If a child otherwise entitled to a
a son, David, who was age 15 at the time of his father's temporary annuity was permanently disabled at the
death. David is entitled to a $500 per month temporary annuity starting date (and there is no surviving spouse
annuity until he reaches age 18 (age 22, if he remains annuity), that child is treated for tax purposes as re-
a full-time student and does not marry until that time). ceiving a lifetime annuity, like a surviving spouse. The
In completing the Simplified Method Worksheet, child must complete the Simplified Method Worksheet
Diane fills out the entries through line 4 exactly as using the recovery factor on line 3 corresponding to the
shown above. That is, she includes on line 1 only the child's age at the annuity starting date. If, besides the
amount of the annuity she herself received and she disabled child, there is another child, or children, enti-
Page 16
tled to temporary annuities, an allocation like the one Lump-sum payment .................................................. $38,400
shown under Surviving spouse with child, earlier, must Plus: Amount previously excludable ..................... 1,000
be made to determine each child's share of the exclu- Total .......................................................................... $39,400
sion. Minus: Employee's total cost ................................ 45,000
Taxable amount (not less than zero) ........................ $ 0
Page 20
Table 1. Simplified Method Worksheet (Keep For Your Records)
See the instructions for the worksheet in Part II under Simplified Method.
1. Enter the total annuity received this year. Also add this amount to the total for Form 1040,
line 16a, or Form 1040A, line 11a $
2. Your cost in the plan (contract) at the annuity starting date, plus any death benefit
exclusion
NOTE: If you received annuity payments in prior years, skip line 3 and enter the amount
from line 4 of last year’s worksheet on line 4.
3. Age at annuity starting date: Enter:
5. Multiply line 4 by the number of months for which this year’s payments were made
NOTE: If your annuity starting date was before 1987, enter the amount from line 5 on line
8 below. Skip lines 6, 7, 10, and 11.
6. Enter any amounts previously recovered tax free in years after 1986
NOTE: If your Form CSA 1099R shows a larger amount, use the amount on line 9 instead.
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Table 2. Worksheet for Lump-Sum Payment (Keep For Your Records)
For annuity starting dates before November 19, 1996.
1. Largest original monthly annuity payment available (after the reduction for a survivor
benefit, if applicable) $
8. Taxable portion of lump-sum payment (subtract line 7 from line 4). Also include the
result in the total for line 16b, Form 1040, or line 11b, Form 1040A $
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Index
E N
Nonresident alien retiree ......... 9 W
Estate tax ........................ 18, 20
Estimated tax ....................... 2, 3 Withholding certificate ............. 3
P Withholding of income tax . 2, 13
Permanently and totally disa- Worksheet, figuring taxa-
F bled .................................... 13 ble amount of annuity 6, 15, 21
Federal Employees' Compen- Worksheet, lump-sum pay-
Physician's statement ............ 14
sation Act (FECA) .............. 14 ment ............................... 7, 22
Filing requirements .................. 4 Worksheet, lump-sum payment
Five– or ten–year tax option ... 7 Q to beneficiary ..................... 19
Forms: Qualified domestic relations or-
5329 ................................. 7, 9 der ...................................... 11
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