Tax Guide to - Internal Revenue Service

ContentsImportant Change for 1998 ............................... 1

Introduction ........................................................ 1

Part IGeneral Information ......................................... 2

Part IIRules for Retirees ............................................ 4

Part IIIRules for Disability Retirement and Credit for

the Elderly or the Disabled ....................... 13

Part IVRules for Survivors of Federal Employees ...... 15

Part VRules for Survivors of Federal Retirees .......... 19

How To Get More Information .......................... 22

Simplified Method Worksheet ........................... 24

Worksheet for Lump-Sum Payment ................. 25

Index .................................................................... 26

Important Change for 1998New table of cost recovery factors for annuitieswith survivor benefits. If your annuity starting date isafter 1997 and your civil service annuity provides sur-vivor benefits for your spouse, you must use a newtable of cost recovery factors (the number of anticipatedmonthly annuity payments) to figure the tax-free partof your annuity payments under the Simplified Method.You determine the factor to use by combining your ageand your spouse's age on the annuity starting date. SeeTable 1, Simplified Method Worksheet, near the endof this publication. Table 2 at the bottom of the work-sheet shows the new cost recovery factors.

IntroductionThis publication explains how the federal income taxrules apply to civil service retirement benefits receivedby retired federal employees (including those disabled)or their survivors. These benefits are paid primarilyunder the Civil Service Retirement System (CSRS) orthe Federal Employees' Retirement System (FERS).

Tax rules for annuity benefits. Part of the annuitybenefits you receive is a tax-free recovery of your con-tributions to the CSRS or FERS. The rest of your ben-efits is taxable. If your annuity starting date is afterNovember 18, 1996, you must use the SimplifiedMethod to figure the taxable and tax-free parts. If yourannuity starting date is before November 19, 1996, youcould have chosen to use the Simplified Method or theGeneral Rule. See Part II, Rules for Retirees.

Department of the TreasuryInternal Revenue Service

Publication 721Cat. No. 46713C

Tax Guide toU.S. CivilServiceRetirementBenefitsFor use in preparing

1998 Returns

Thrift Savings Plan. The Thrift Savings Plan (TSP)provides federal employees with the same savings andtax benefits that many private employers offer theiremployees. This plan is similar to private sector 401(k)plans. You can defer tax on part of your pay by havingit contributed to your account in the plan. The contri-butions and earnings on them are not taxed until theyare distributed to you. See Thrift Savings Plan in PartII.

Useful ItemsYou may want to see:

Publication

m 524 Credit for the Elderly or the Disabled

m 575 Pension and Annuity Income

m 590 Individual Retirement Arrangements (IRAs)(Including Roth IRAs and Education IRAs)

m 939 General Rule for Pensions and Annuities

Form (and Instructions)

m CSA 1099R Statement of Annuity Paid

m CSF 1099R Statement of Survivor Annuity Paid

m 1099R Distributions From Pensions, Annuities, Re-tirement or Profit-Sharing Plans, IRAs, In-surance Contracts, etc.

m 5329 Additional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities, Mod-ified Endowment Contracts, and MSAs

See How To Get More Information near the end ofthis publication for information about getting thesepublications and forms.

Part IGeneral InformationThis part of the publication contains information that canapply to most recipients of civil service retirement ben-efits.

Refund of ContributionsIf you leave federal government service or transfer toa job not under the retirement system and you are noteligible for an immediate annuity, you can choose toreceive a refund of the money to your credit in the re-tirement fund (your total contributions, both regular andvoluntary, plus any interest payable). The amount of therefund that is more than your total contributions to thefund (cost) is taxable. It is taxable in the year the refundis distributed or made available to you. If you only re-ceive your contributions, no part of the refund is taxable.

Generally, some or all of the taxable part of the dis-tribution (the interest payable) from active participationin the retirement plan before 1974 may qualify for cap-ital gain treatment. The taxable part from participationafter 1973 is taxed as ordinary income, but may beeligible for the 5- or 10-year tax option.

The taxable part of the distribution may also besubject to an additional 10% tax on early distributionsif you separate from service before the calendar yearin which you reach age 55. For more information, seeLump-Sum Distributions and Tax on Early Distributionsin Publication 575.

CAUTION!

This discussion does not apply to the lump-sumpayment available to certain retirees whochoose the alternative annuity option. See Al-

ternative Annuity Option in Part II.

Rollovers. If you leave federal service and receiveyour contributions plus interest, you may be able to rollover all or part of the interest tax free into anotherqualified plan or an individual retirement arrangement(IRA). Tax will be withheld at a 20% rate unless you rollthe interest over by having the Office of PersonnelManagement (OPM) transfer it directly to an IRA orother plan.

Under the CSRS, but not the FERS, interest is notpaid on civil service contributions for service after 1956unless the refund of contributions covers a period ofgovernment service of more than 1 year but less than5 years. Many employees who withdraw their contribu-tions under the CSRS do not get interest; consequently,they have nothing to roll over.

If you are the surviving spouse of an employee orretiree and you receive a refund of the contributionsplus interest, you may roll over all or part of the interestinto an IRA.

See Rollover Rules in Part II for more information.

Tax Withholdingand Estimated TaxThe annuity you receive is subject to federal income taxwithholding based on tables prepared by the InternalRevenue Service, unless you choose not to have taxwithheld. The Office of Personnel Management will tellyou how to make the choice. The choice for no with-holding remains in effect until you change it. Thesewithholding rules also apply to a disability annuity,whether received before or after minimum retirementage.

If you choose not to have tax withheld, or if you donot have enough tax withheld, you may have to makeestimated tax payments. See Part III for rules on disa-bility retirement.

CAUTION!

You may owe a penalty if the total of yourwithheld tax and estimated tax does not covermost of the tax shown on your return. Generally,

you will owe the penalty if the additional tax you mustpay with your return is $1,000 or more and more than10% of the tax shown on your return. For more infor-mation, including exceptions to the penalty, see Publi-cation 505, Tax Withholding and Estimated Tax.

Choosing no withholding on payments outside theUnited States. The choice for no withholding generallycannot be made for annuity payments to be deliveredoutside the United States and its possessions.

To choose exemption from withholding if you are aU.S. citizen or resident, you must provide OPM with

your home address in the United States or its pos-sessions. Otherwise, OPM has to withhold tax. For ex-ample, OPM must withhold if you provide a U.S. ad-dress for a nominee, trustee, or agent (such as a bank)to whom the benefits are to be delivered, but you donot provide your own U.S. home address.

You also may choose exemption from this withhold-ing if you certify to OPM that you are not a U.S. citizen,a U.S. resident alien, or someone who left the UnitedStates to avoid tax. But if you so certify, you may besubject to the 30% flat rate withholding that applies tononresident aliens. For details, see Publication 519,U.S. Tax Guide for Aliens.

Withholding certificate. If you give OPM a FormW-4P-A, Election of Federal Income Tax Withholding,choosing withholding, your annuity will be treated likewages for income tax withholding purposes. If you donot make a choice, OPM must withhold as if you weremarried with three withholding allowances.

To change the amount of tax withholding or tostop withholding, call OPM's Retirement Infor-mation Office at 1-888-767-6738 or call

Annuitant Express at 1-800-409-6528. No special formis needed. You will need your retirement claim number(CSA or CSF) and your social security number whenyou call.

Withholding from certain lump-sum payments. Ifyou leave the federal government before becoming eli-gible to retire and you apply for a refund of your con-tributions, or you die without leaving a survivor eligiblefor an annuity, you or your beneficiary will receive adistribution of your contributions to the retirement planplus any interest payable. Tax will be withheld at a 20%rate on the interest distributed. However, tax will notbe withheld if you roll it over to an IRA or a qualifiedplan by having OPM transfer it directly to the IRA orother plan. See Rollover Rules in Part II. If you receiveonly your contributions, no tax will be withheld.

If you retire and elect to receive a reduced annuityand a lump-sum payment under the alternative annuityoption, tax will be withheld at a 20% rate on the taxablepart of the lump-sum payment received. (See Alterna-tive Annuity Option in Part II for information about thisoption.) However, no tax will be withheld from the lumpsum if you roll the taxable part over to an IRA or aqualified plan by having OPM transfer the taxable partdirectly to the IRA or other plan.

Estimated tax. Generally, for 1999, you should makeestimated tax payments if you expect to owe at least$1,000 in tax (after subtracting your withholding andcredits) and you expect your withholding and yourcredits to be less than the smaller of:

1) 90% of the tax to be shown on your 1999 incometax return, or

2) The tax shown on your 1998 income tax return(105% of that amount if the adjusted gross incomeshown on the return was more than $150,000($75,000 if your filing status for 1999 will be married

filing separately)). The return must cover all 12months.

You do not have to pay estimated tax for 1999 if youwere a U.S. citizen or resident for all of 1998 and youhad no tax liability for the full 12-month 1998 tax year.

Form 1040-ES contains a worksheet that you canuse to see if you should make estimated tax payments.For more information, see chapter 2 in Publication 505.

Form CSA 1099R. Form CSA 1099R, Statement ofAnnuity Paid, is mailed to you by OPM each year. Itwill show any tax you had withheld. File copy B of FormCSA 1099R with your return if any federal income taxwas withheld.

Withholding from Thrift Savings Plan payments. Adistribution that you receive from the Thrift Savings Plan(TSP) is subject to federal income tax withholding. Theamount withheld is 20% if the distribution is an eligiblerollover distribution, 10% if it is a nonperiodic distribu-tion, or an amount based on IRS tables if it is a periodicdistribution. However, you can usually choose not tohave tax withheld from TSP payments other than eligi-ble rollover distributions. By January 31 after the endof the year in which you receive a distribution, the TSPwill issue Form 1099R , Distributions From Pensions,Annuities, Retirement or Profit-Sharing Plans, IRAs,Insurance Contracts, etc., showing the total distribu-tions you received in the prior year and the amount oftax withheld.

For a detailed discussion of withholding on distribu-tions from the TSP, see Important Tax InformationAbout Payments From Your Thrift Savings Plan Ac-count (Rev. July 1998), available from your agencypersonnel office or from the TSP.

The above document is also available on theInternet at www.tsp.gov . Select “Forms &Publications,” then select “Other Documents.”

Filing RequirementsIf your gross income, including the taxable part of yourannuity, is less than a certain amount, you generallydo not have to file a federal income tax return. Thegross income filing requirements are in the instructionsto the Form 1040, 1040A, or 1040EZ, that you get eachyear. You should check these requirements closelybecause they change occasionally.

Children. If you are the surviving spouse of a federalemployee or retiree and your monthly annuity checkincludes a survivor annuity for one or more children,each child's annuity counts as his or her own income(not yours) for federal income tax purposes.

If your child can be claimed as a dependent, treathis or her annuity as unearned income to apply the filingrequirements. For 1998, a return generally must befiled for the child if his or her gross income (includingthe taxable part of the child's annuity) was more than$700. (If the child was blind, see your tax return in-structions for the filing requirement.) If your child can-not be claimed as a dependent, a return generally mustbe filed if his or her gross income was $6,950 or more.

Form CSF 1099R. By January 31 after the end ofeach tax year, you should receive Form CSF 1099R,Statement of Survivor Annuity Paid, which will show thetotal amount of the annuity you received in the pastyear. It should also separately show the survivor an-nuity for a child or children. Only the part that is eachindividual's survivor annuity should be shown on thatindividual's Form 1040 or 1040A.

If your Form CSF 1099R does not separately showthe amount paid to you for a child or children, attach astatement to your return, along with a copy of FormCSF 1099R, explaining why the amount shown on thetax return differs from the amount shown on Form CSF1099R.

You may request a Summary of Benefits,showing the amounts paid to you for yourchild(ren), from OPM by calling Annuitant Ex-

press at 1-888-767-6738. You will need your CSF claimnumber and your social security number when you call.

Taxable part of annuity. To find the taxable partof each annuity, see the discussion in Part IV, Rules forSurvivors of Federal Employees, or Part V, Rules forSurvivors of Federal Retirees, whichever applies.

Part IIRules for RetireesThis part of the publication is for retirees who retiredon nondisability retirement. If you retired on disability,see Part III, Rules for Disability Retirement and Creditfor the Elderly or the Disabled, later.

Annuity statement. The statement you received fromthe Office of Personnel Management (OPM) when yourCSRS or FERS annuity was approved shows your totalcontributions to the retirement plan (your cost), thecommencing date (the annuity starting date), and thegross monthly rate of your annuity benefit. The grossmonthly rate is the amount you were to get after yourannuity was adjusted for electing the survivor's annuityand for electing the lump-sum payment under the al-ternative annuity option (if either applied) but beforeincome tax withholding, insurance premiums, etc., werededucted.

You will use the information from your annuitystatement to figure the tax-free recovery of your cost.

Your cost. If you are a retired employee, your monthlyannuity check contains an amount on which you havepreviously paid income tax. This amount representspart of your contributions to the retirement plan. Eventhough you did not receive the money that was con-tributed to the plan, it was included in your gross in-come for federal income tax purposes in the year itwas taken out of your pay.

The cost of your annuity is the total of your contri-butions to the retirement plan. It includes any deemeddeposits and any deemed redeposits. See Deemeddeposits and redeposits under Alternative Annuity Op-tion, later.

Repayment of contributions plus interest. If yourepaid to the retirement plan contributions that you hadwithdrawn earlier, or if you paid into the plan to receivefull credit for service not subject to retirement de-ductions, the entire repayment, including any interest,is a part of your cost. You cannot claim an interest de-duction for any interest payments. You cannot treatthese payments as voluntary contributions; they areconsidered regular employee contributions.

Recovering your cost tax free. How you figure thetax-free recovery of the cost of your CSRS or FERSannuity depends on your annuity starting date.

• If your annuity starting date is before July 2, 1986,either the Three-Year Rule or the General Rule(both discussed later in this Part II) would apply toyour annuity.

• If your annuity starting date is after July 1, 1986,and before November 19, 1996, you must use theGeneral Rule or the Simplified Method.

• If your annuity starting date is after November 18,1996, you must use the Simplified Method.

Under the General Rule or the Simplified Method,each of your monthly annuity payments is made up oftwo parts: the tax-free part that is a return of your cost,and the taxable balance. The tax-free part is a fixeddollar amount. It remains the same, even if your annuityis increased. This rule applies as long as you receiveyour annuity. However, see Exclusion limit, later.

Changing the method. If your annuity starting dateis after July 1, 1986, but before November 19, 1996,you can change the way you figure the tax-free recov-ery of your cost from the General Rule to the SimplifiedMethod, or from the Simplified Method to the GeneralRule. However, you must use the same method for allyears. To do this, you must file amended returns(showing the change) for all previous tax years, begin-ning with the year in which you received your first an-nuity payment. Generally, you must make this changebefore the later of:

• 3 years after the due date of the return for the yearin which you received your first annuity payment,or

• 2 years after the tax for that year was paid.

Annuity starting date. If you retire from federal gov-ernment service on a regular annuity, your annuitystarting date is the “commencing date” on your annuitystatement from OPM.

If something delays payment of your annuity, suchas a late application for retirement, it does not affect thedate your annuity begins to accrue or your annuitystarting date.

Disability retirement. If you retired on disability, seePart III, Rules for Disability Retirement and Credit forthe Elderly or the Disabled, later in this publication, todetermine the date you will begin to report your disa-bility payments as an annuity.

Exclusion limit. If your annuity starting date is after1986, the total amount of annuity income that you (orthe survivor annuitant) can exclude over the years asa return of your cost may not exceed your total cost.

Example. Your annuity starting date is after 1986and you exclude $100 a month under the SimplifiedMethod. If your cost is $12,000, the exclusion ends after10 years (120 months). Thereafter, your entire annuityis taxable.

Annuity starting date before 1987. If your annuitystarting date was before 1987, you continue to takeyour monthly exclusion figured under the General Ruleor Simplified Method for as long as you receive yourannuity. If you chose a joint and survivor annuity, yoursurvivor continues to take the survivor's exclusion fig-ured as of the annuity starting date. The total exclusionmay be more than your cost.

Deduction of unrecovered cost. If your annuitystarting date is after July 1, 1986, and the cost of yourannuity has not been fully recovered at your (or thesurvivor annuitant's) death, a deduction is allowed forthe unrecovered cost. The deduction is claimed on your(or your survivor's) final tax return as a miscellaneousitemized deduction (not subject to the2%-of-adjusted-gross-income limit). If your annuitystarting date is before July 2, 1986, no tax benefit isallowed for any unrecovered cost at death.

Choosing a survivor annuity after retirement. If youretired without a survivor annuity and began reportingyour annuity under the Simplified Method, do notchange your tax-free monthly amount even if you laterchoose a survivor annuity.

If you retired without a survivor annuity and decidedto report your annuity under the General Rule, you mustfigure a new exclusion percentage if you later choosea survivor annuity. To figure it, reduce your cost by theamount you previously recovered tax free. Figure theexpected return as of the date the reduced annuity be-gins. For details on the General Rule, see Publication939.

Canceling a survivor annuity after retirement. If younotify the Office of Personnel Management (OPM) thatyour marriage has ended (by death, divorce, orannulment), your annuity can be increased to removethe reduction for a survivor benefit. The increased an-nuity does not change the cost recovery you figured atthe annuity starting date. The tax-free part of eachannuity payment remains the same.

Simplified MethodIf your annuity starting date is after November 18, 1996,you must use the Simplified Method to figure the tax-free part of your CSRS or FERS annuity. You couldhave chosen to use either the Simplified Method or theGeneral Rule if your annuity starting date is after July1, 1986, but before November 19, 1996. The SimplifiedMethod does not apply if your annuity starting date isbefore July 2, 1986.

Under the Simplified Method, you figure the tax-freepart of each full monthly payment by dividing your cost

by a number of months based on your age. This num-ber will differ depending on whether your annuity start-ing date is on or before November 18, 1996, or later.If your annuity starting date is after 1997 and your an-nuity includes a survivor benefit for your spouse, thisnumber is based on your combined ages.

Table 1. Use Table 1, Simplified Method Worksheet(near the end of this publication), to figure your taxableannuity. Be sure to keep the completed worksheet; itwill help you figure your taxable amounts for later years.

Line 2. See the discussion at the beginning of thisPart II for an explanation of your cost in the plan. If yourannuity starting date was after November 18, 1996, andyou chose the alternative annuity option (explained laterunder Alternative Annuity Option), you must reduceyour cost by the part of the lump-sum payment youreceived tax-free as a return of your cost.

Line 3. Find the appropriate number from one of thetables at the bottom of the worksheet. If your annuitystarting date is after 1997, use:

• Table 1 for an annuity without a survivor's benefit,or

• Table 2 for an annuity with a survivor's benefit.

If your annuity starting date is before 1998, use Table1.

Line 6. If you retired before 1998, the amount pre-viously recovered tax free that you must enter on line6 is the total amount from line 10 of last year's work-sheet. If your annuity starting date is before November19, 1996, and you chose the alternative annuity option,it includes the tax-free part of the lump-sum paymentyou received.

Example. Bill Kirkland retired from the federal gov-ernment on April 31, 1998, under an annuity that willprovide a survivor benefit for his wife, Kathy. His annuitystarting date is May 1, 1998. He must use the SimplifiedMethod to figure the tax-free part of his annuity benefits.

Bill's monthly annuity benefit is $1,000. He had con-tributed $24,700 to his retirement plan and had receivedno distributions before his annuity starting date. At hisannuity starting date, he was 65 and Kathy was 57.

Bill's completed worksheet (Table 1) is shown on thenext page. To complete line 3, he used Table 2 at thebottom of the worksheet and found the number in thesecond column opposite the age range that includes122 (his and Kathy's combined ages). Bill keeps a copyof the completed worksheet for his records. It will helphim (and Kathy, if she survives him) figure the taxableamount of the annuity in later years.

Bill's tax-free monthly amount is $80. (See line 4 ofthe worksheet.) If he lives to collect more than 310monthly payments, he will have to include in his grossincome the full amount of any annuity payments re-ceived after 310 payments have been made.

If Bill does not live to collect 310 monthly paymentsand his wife begins to receive monthly payments, shewill also exclude $80 from each monthly payment until310 payments (Bill's and hers) have been collected. Ifshe dies before 310 payments have been made, amiscellaneous itemized deduction (not subject to the

Table 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

10.

1.

Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion2.

Enter the appropriate number from Table 1 below. But if your annuity starting date wasafter 1997 and the payments are for your life and that of your beneficiary, enter theappropriate number from Table 2 below

3.

Divide line 2 by line 34.

Multiply line 4 by the number of months for which this year’s payments were made. Ifyour annuity starting date was before 1987, enter this amount on line 8 below and skiplines 6, 7, 10, and 11. Otherwise go to line 6

5.

Enter any amounts previously recovered tax free in years after 19866.

Subtract line 6 from line 27.

Enter the smaller of line 5 or line 78.

Taxable annuity for year. Subtract line 8 from line 1. Enter the result, but not less thanzero. Also add this amount to the total for Form 1040, line 16b, or Form 1040A, line 11b.If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount onthis line instead

9.

Add lines 6 and 8

Balance of cost to be recovered. Subtract line 10 from line 211.

Simplified Method Worksheet (Keep For Your Records)

$

$

$

See the instructions for the worksheet in Part II under Simplified Method.

NOTE: If your annuity starting date was before this year and you completed this worksheetlast year, skip line 3 and enter the amount from line 4 of last year’s worksheet on line 4below. Otherwise, go to line 3.

Table 1 for Line 3 Above

AND your annuity starting date was—IF the age atannuity startingdate was. . .

before November 19, 1996,enter on line 3. . .

after November 18, 1996,enter on line 3. . .

55 or under56–6061–6566–7071 or older

300260240170120

360310260210160

Table 2 for Line 3 AboveIF the combined ages at annuitystarting date were. . . THEN enter on line 3. . .

110 and under111–120121–130131–140141 or older

410360310260210

8,000

24,700

310

80

640

0

24,700

640

7,360

640

24,060

2%-of-adjusted-gross-income limit) will be allowed forthe unrecovered cost on her final income tax return.

General RuleIf your annuity starting date is after November 18, 1996,you cannot use the General Rule to figure the tax-freepart of your CSRS or FERS annuity. If your annuitystarting date is after July 1, 1986, but before November19, 1996, you could have chosen to use either theGeneral Rule or the Simplified Method. If your annuitystarting date is before July 2, 1986, you could havechosen to use the General Rule only if you could notuse the Three-Year Rule.

Under the General Rule, you figure the tax-free partof each full monthly payment by multiplying the initialgross monthly rate of your annuity by an exclusionpercentage. Figuring this percentage is complex andrequires the use of actuarial tables. For these tablesand other information about using the General Rule,see Publication 939, General Rule for Pensions andAnnuities.

Three-Year RuleIf your annuity starting date was before July 2, 1986,you probably had to report your annuity using theThree-Year Rule. Under this rule, you excluded all theannuity payments from income until you fully recoveredyour cost. After the cost was recovered, all paymentsbecame fully taxable. You cannot use another rule toagain exclude amounts from income.

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

Alternative Annuity OptionIf you are a nondisability retiree under either CSRS orFERS, you may be able to choose the alternative an-nuity option. This option is generally available only tothose with certain life-threatening illnesses or othercritical medical conditions. If you choose this option,you will receive a lump-sum payment equal to your totalregular contributions to the retirement plan plus anyinterest that applies. Your monthly annuity is then re-duced by about 5 to 15 percent to adjust for this pay-ment.

Lump-sum payment. If you choose the alternativeannuity option, the lump-sum payment you receive willhave a taxable part and a tax-free part. The tax-freeamount represents part of your cost, and the taxableamount represents part of the earnings on your annuitycontract. To determine the taxable part of your lump-sum payment, you must know the present value of yourannuity contract.

To find out the present value of your annuitycontract, call the IRS Actuarial Branch 3 at202–622–7789 (not a toll-free call).

You can figure the taxable part of a lump-sum pay-ment using Table 2, Worksheet for Lump-SumPayment, near the end of this publication.

Example. David Brown retired from the federalgovernment in 1998. He had contributed $31,000 tohis retirement plan and chose to receive a lump-sumpayment of that amount under the alternative annuityoption. The present value of his annuity contract was$155,000. Using the Table 2 worksheet, he figures thetaxable part of the lump-sum payment and his net costin the plan. That worksheet is shown below.

Table 2.

Enter your lump-sum payment (yourcost in the plan at the annuitystarting date)

1.

Enter the present value of yourannuity contract

2.

Divide line 1 by line 23.Tax-free part of lump-sumpayment. Multiply line 1 by thenumber on line 3. ( Caution: Do notinclude this amount on line 6 ofTable 1 in this publication.)

4.

Taxable part of lump-sumpayment/Net cost in the plan.Subtract line 4 from line 1. Includethis amount in the total on line 16bof Form 1040 or line 11b of Form1040A. Also, enter this amount online 2 of Table 1 in this publication

5.

Worksheet for Lump-Sum Payment(Keep For Your Records)

$

See the instructions for the worksheet inPart II under Alternative Annuity Option.

31,000

155,000.20

6,200

24,800

David must add the $24,800 taxable part of thelump-sum payment to the taxable part of the annuitypayments he received in 1998 and include the total onhis 1998 return.

Simplified method after receiving a lump-sum pay-ment. If you have chosen to receive a lump-sum pay-ment under the alternative annuity option, you must usea special rule to figure the taxable part of your annuitypayments. Under this rule, you must reduce your costin the plan (line 2 of Table 1 in this publication) by thepart of the lump-sum payment you received tax free.Do not include this tax-free amount with other amountsrecovered tax free (line 6 of Table 1 in this publication)when limiting your total exclusion to your total cost.

Example. Under the facts in the previous example,David figures the taxable part of his annuity paymentsby reducing his $31,000 cost in the annuity plan by the$6,200 tax-free part of the lump-sum payment. He en-ters his $24,800 net cost in the plan (from line 5 ofTable 2) on line 2 of Table 1. He does not include the$6,200 tax-free part of the lump-sum payment on line6 of Table 1. (David's Table 1 is not shown.)

Annuity starting date before November 19, 1996. Ifyour annuity starting date was before November 19,1996, and you chose the alternative annuity option, a

different rule applied to determine the taxable and tax-free parts of your lump-sum payment. Under that rule,the tax-free part was in the same proportion to thelump-sum payment that the reduction in your annuitybenefit under the option was to your original annuitybenefit without the option.

A different rule also applies to determine the tax-freepart of your annuity payments. Under this rule, you donot reduce your cost in the plan (line 2 of Table 1 in thispublication) by the part of the lump-sum payment youreceived tax free. However, you must include thattax-free amount with other amounts previously recov-ered tax free (line 6 of Table 1 in this publication) whenlimiting your total exclusion to your total cost.

CAUTION!

Reemployment after receiving a lump-sumpayment. If you chose to receive a lump-sumpayment when you retired and then you were

reemployed by the federal government before retiringagain, your Form CSA 1099R may show only theamount of your contributions to your retirement planduring your reemployment. If the amount on the formdoes not include all your contributions, disregard it anduse your total contributions to figure the taxable partof your annuity payments.

Rollovers. You can roll over the taxable part of thelump-sum payment to an IRA or a qualified retirementplan. OPM must withhold income tax of 20% on thetaxable part of the payment unless you have OPMtransfer that part directly to an IRA or a qualified re-tirement plan. See Rollover Rules later in this part formore information.

If your contributions include a deemed deposit orredeposit, discussed later, OPM will make a directrollover only up to the net lump-sum payment amount.If the taxable amount is more than your net lump-sumpayment, you can roll over the difference using yourown funds within 60 days. If you do not roll over thisdifference, you must include it as taxable income onyour income tax return.

5- or 10-year tax option or capital gain treatment.Your lump-sum payment does not qualify for the 5- or10-year tax option or capital gain treatment. Do not re-port the lump-sum payment or any interest on Form4972, Tax on Lump-Sum Distributions. This form isused to elect these optional methods. For more infor-mation, get Publication 575.

Where to report. Add any actual or deemed paymentof your lump-sum credit to the total for line 16a, Form1040, or line 11a, Form 1040A. Add the taxable partto the total for line 16b, Form 1040, or line 11b, Form1040A, unless you roll over the taxable part to an IRAor a qualified retirement plan. If you receive the lump-sum payment in two installments, include any interestpaid with the second installment on line 8a.

Additional tax. If you retired before the calendar yearin which you reach age 55, you must pay an additionaltax equal to 10% of the taxable amount of the lump-sum

payment that you do not roll over to an IRA or a qual-ified retirement plan. Report the additional tax on line53, Form 1040. You may also have to complete Form5329, Additional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities, Modified En-dowment Contracts, and MSAs, and attach it to yourForm 1040. If you do not have to attach Form 5329,write “No” on the dotted line next to line 53 of your Form1040.

The 10% additional tax does not apply to the taxableamount of the lump-sum payment that is equal to yourdeductible medical expenses for the year (after re-duction by 71/2% of your adjusted gross income), evenif you do not itemize deductions.

Deemed deposits and redeposits. Your lump-sumcredit is the sum of your contributions to the retirementsystem, interest on those contributions, and anydeemed deposits and deemed redeposits. Deemeddeposits (including interest) are for federal employmentduring which no retirement contributions were taken outof your pay. Deemed redeposits (including interest) arefor any refunds of retirement contributions that you re-ceived but have not repaid. You will get credit for thisprior service without actually making these deposits orredeposits. Your reduced (alternative) annuity will befigured as though, before retirement, you had madethese deposits and redeposits to OPM. The lump-sumpayment actually made to you will not include theseamounts.

Lump-sum payment in installments. If you choosethe alternative annuity option, you usually will receivethe lump-sum payment in two equal installments. Youwill receive the first installment after you make thechoice upon retirement. The second installment will bepaid to you, with interest, in the next calendar year.(Exceptions to the installment rule are provided forcases of critical medical need.)

Even though the lump-sum payment is made in in-stallments, the overall tax treatment (explained at thebeginning of this discussion) is the same as if the wholepayment were paid at once. If the payment has a tax-free part, you must treat the taxable part as receivedfirst.

Federal Gift TaxIf, through the exercise or nonexercise of an electionor option, you provide an annuity for your beneficiaryat or after your death, you have made a gift. The giftmay be taxable for gift tax purposes. The value of thegift is equal to the value of the annuity.

Joint and survivor annuity. If the gift is an interest ina joint and survivor annuity where only you and yourspouse can receive payments before the death of thelast spouse to die, the gift will generally qualify for theunlimited marital deduction. This will eliminate any gifttax liability with regard to that gift.

If you provide survivor annuity benefits for someoneother than your current spouse, such as your formerspouse, the unlimited marital deduction will not apply.This may result in a taxable gift.

More information. For information about the gifttax, see Publication 950, Introduction to Estate and GiftTaxes.

Retirement During the Past YearIf you have recently retired, the following discussionscovering annual leave, voluntary contributions, andcommunity property may apply to you.

Annual leave. Treat a payment for accrued annualleave received on retirement as a salary payment. It istaxable as wages in the tax year you receive it.

Voluntary contributions. Voluntary contributions tothe retirement fund are those made in addition to theregular contributions that were deducted from yoursalary. They also include the regular contributionswithheld from your salary after you have the years ofservice necessary for the maximum annuity allowed bylaw. Voluntary contributions are not the same as em-ployee contributions to the Thrift Savings Plan. SeeThrift Savings Plan, later.

Additional annuity benefit. If you choose an addi-tional annuity benefit from your voluntary contributions,it is treated separately from the annuity benefit thatcomes from the regular contributions deducted fromyour salary. This separate treatment applies for figuringthe amounts to be excluded from, and included in, grossincome. It does not matter that you receive only onemonthly check covering both benefits. Each year youwill receive Form CSA 1099R, Statement of AnnuityPaid, that will show how much of your total annuity re-ceived in the past year was from each type of benefit.

Figure the taxable and tax-free parts of your addi-tional monthly benefits from voluntary contributions us-ing the rules that apply to regular CSRS and FERSannuities, as explained earlier in Part II.

Refund of voluntary contributions. If you choosea refund of your voluntary contributions plus accruedinterest, the interest is taxable to you in the tax year itis distributed unless you roll it over to an IRA or aqualified retirement plan. See Rollover Rules, later. Theinterest does not qualify for the 5- or 10-year tax option.

Example. You retired in November when youreached the necessary age and years of service to re-tire. You applied for an annuity based on your regularcontributions to the plan. You chose a refund of yourvoluntary contributions plus interest.

On December 15, you received the refund. The in-terest is fully taxable (no 5- or 10-year tax option treat-ment is allowed) unless you roll it over to an IRA or aqualified retirement plan within 60 days.

Additional tax. The accrued interest included in therefund of voluntary contributions and not rolled over intoan IRA or a qualified retirement plan is generally subjectto a 10% additional tax on early distributions if the re-fund is made to you before the date you reach age591 / 2. However, the tax does not apply if the refund ismade after your retirement and you retired during orafter the calendar year in which you reached age 55.

Also, the 10% additional tax does not apply if youretired at any age because of total and permanent dis-ability. Nor does the additional tax apply to the accrued

interest that is equal to your deductible medical ex-penses for the year (the amount of medical expensesthat exceeds 71/2% of your adjusted gross income),even if you do not itemize deductions.

Report the additional tax on line 53, Form 1040. Youmay also have to complete Form 5329 and attach it toyour Form 1040. If you do not have to attach Form5329, write “No” on the dotted line next to line 53 of yourForm 1040.

Community property laws. State community propertylaws apply to your annuity. These laws will affect yourincome tax only if you file a separate return from yourspouse.

Generally, the determination of whether your annuityis separate income (taxable to you) or community in-come (taxable to both you and your spouse) is basedon your marital status and domicile when you wereworking. Regardless of whether you are now living ina community property state or a noncommunity propertystate, your current annuity may be community incomeif it is based on services you performed while marriedand domiciled in a community property state.

At any time, you have only one domicile even thoughyou may have more than one home. Your domicile isyour fixed and permanent legal home to which, whenabsent, you intend to return. The question of yourdomicile is mainly a matter of your intentions as indi-cated by your actions.

If your annuity is a mixture of community income andseparate income, you must divide it between the twokinds of income. The division is based on your periodsof service and domicile in community and noncommu-nity property states while you were married.

For more information, see Publication 555, Commu-nity Property.

Reemployment After RetirementIf you retired from federal service and were later re-employed by the federal government, you can continueto receive your annuity during reemployment. Your an-nuity will continue to be taxed just as it was before. Ifyou are still recovering your cost, you continue to doso. If you have recovered your cost, the annuity youreceive while you are reemployed is generally fullytaxable. The employing agency will pay you the differ-ence between your salary for your period of reemploy-ment and your annuity. This amount is taxable aswages.

Nonresident AliensThere are some special rules for nonresident alienfederal employees performing services outside theUnited States and for nonresident alien retirees andbeneficiaries.

Special rule for figuring your total contributions.Your contributions to the retirement plan (your cost)also include the government's contributions to the planto a certain extent. You include government contribu-tions that would not have been taxable to you at thetime they were contributed if they had been paid directlyto you. For example, government contributions would

not have been taxable to you if, at the time made, yourservices were performed outside the United States.Thus, your cost is increased by government contribu-tions that you would have excluded as income fromforeign services if you had received them directly aswages. This reduces the benefits that you, or yourbeneficiary, must include in income.

This method of figuring your total contributions doesnot apply to any contributions the government madeon your behalf after you became a citizen or residentof the United States.

Limit on taxable amount. There is a limit on the tax-able amount of payments received from the CSRS, theFERS, or the TSP by a nonresident alien retiree ornonresident alien beneficiary. This limited taxableamount is in the same proportion to the otherwise tax-able amount that the retiree's total U.S. Governmentbasic pay other than tax-exempt pay for services per-formed outside the United States is to the retiree's totalU.S. Government basic pay for all services.

Basic pay includes regular pay plus any standbydifferential. It does not include bonuses, overtime pay,certain retroactive pay, uniform or other allowances, orlump-sum leave payments.

To figure the limited taxable amount of your CSRSor FERS annuity or your TSP distributions, use the fol-lowing worksheet.

Enter the otherwise taxable amount ofthe CSRS or FERS annuity (from line 9of Table 1) or TSP distributions

Worksheet for Nonresident Alien

Enter the total U.S. Government basicpay other than tax-exempt pay forservices performed outside the UnitedStatesEnter the total U.S. Government basicpay for all servicesDivide line 2 by line 3

1.

2.

3.

4.Limited taxable amount. Multiply line 1by the number on line 4. Enter thisamount on Form 1040NR, line 17b

5.

$

Example 1. You are a nonresident alien who hadperformed all services for the United States abroad asa nonresident alien. You retired and began to receivea monthly annuity of $200. Your total basic pay for allservices for the United States was $100,000.

Without regard to the limit explained above, the tax-able amount of your annuity would be $720. Becauseyou are a nonresident alien, you figure the taxableamount of your annuity as follows.




1.

2.

3.


5.

$ 720

0

100,0000

0

Example 2. You are a nonresident alien who retiredfrom your employment with the United States. For yourwork performed both within the United States andabroad you began to receive a monthly annuity of $240.

Your total basic pay for your services for the UnitedStates was $120,000; $80,000 was for work done in theUnited States, and $40,000 was for your work done ina foreign country. You were a nonresident alien duringall of your employment.

Without regard to the limit explained above, the tax-able amount of your annuity would be $1,980. Becauseyou are a nonresident alien, you figure the taxableamount of your annuity as follows.




1.

2.

3.


5.

$ 1,980

80,000

120,000.667

1,321

Thrift Savings PlanAll of the money in your Thrift Savings Plan (TSP) ac-count is taxed as ordinary income when you receive it.This is because neither the contributions to your TSPaccount nor its earnings have been previously includedin your taxable income. The way that you withdraw youraccount balance determines when you must pay thetax.

Direct rollover by the TSP. If you ask the TSP totransfer any part of the money in your account to anindividual retirement arrangement (IRA) or other qual-ified retirement plan, the tax on that part is deferred untilyou receive payments from the IRA or other plan. SeeRollover Rules, later.

TSP annuity. If you ask the TSP to buy an annuity withthe money in your account, the annuity payments aretaxed when you receive them. However, the paymentsare not subject to the tax on early distributions, even ifyou are under age 55 when they begin.

Cash withdrawals. If you withdraw any of the moneyin your TSP account, it is taxed as ordinary incomewhen you receive it unless you roll it over into an IRAor other qualified plan. (See Rollover Rules, later.) Ifyou receive your entire TSP account balance in a singletax year, you may be able to use the 5- or 10-year taxoption to figure your tax. See Lump-Sum Distributionsin Publication 575 for details.

If you receive a single payment or you choose toreceive your account balance in monthly payments overa period of less than 10 years, the TSP must withhold20% for federal income tax. If you choose to receiveyour account balance in monthly payments over a pe-riod of 10 or more years or a period based on your lifeexpectancy, the payments are subject to withholdingunder the same rules as your CSRS or FERS annuity.See Tax Withholding and Estimated Tax in Part I.

Tax on early distributions. Any money paid to youfrom your TSP account before you reach age 591/2 isgenerally subject to an additional 10% tax on earlydistributions. Report the tax on line 53 of Form 1040.You may also have to file Form 5329. For details, seethe Form 1040 instructions for line 53.

This additional tax does not apply in any of the fol-lowing situations.

1) You choose to receive your account balance inmonthly payments based on your life expectancy.

2) You retire on disability.

3) You separate from government service during orafter the calendar year in which you reach age 55.

Also, this tax does not apply to the amount of pay-ments you receive equal to your medical expenses forthe year, minus 7.5% of your adjusted gross income.

Outstanding loan. If the TSP declares a distributionfrom your account because money you borrowed hasnot been repaid when you separate from governmentservice, your account is reduced and the amount of thedistribution (your unpaid loan balance and any unpaidinterest) is taxed in the year declared. The distributionalso may be subject to the additional 10% tax on earlydistributions. However, the tax will be deferred if youmake a rollover contribution to an IRA or other qualifiedplan equal to the declared distribution amount. See Rollover Rules, next. If you withdraw any money fromyour TSP account the same year, the TSP must with-hold income tax of 20% of the total of the declareddistribution and the amount withdrawn.

More information. For more information about theTSP, see Summary of the Thrift Savings Plan forFederal Employees, distributed to all federal employ-ees. Also see Important Tax Information About Pay-ments From Your Thrift Savings Plan Account (Rev.

July 1998) and Tax Treatment of TSP Payments toNonresident Aliens and Their Beneficiaries (Rev. Au-gust 1998), which are available from your agency per-sonnel office or from the TSP.

The above documents are also available on theInternet at www.tsp.gov . Select “Forms andPublications.”

Rollover RulesA rollover is a tax-free withdrawal of cash or other as-sets from one qualified retirement plan or IRA and itsreinvestment in another qualified retirement plan or IRA.You do not include the amount rolled over in your in-come, and you cannot take a deduction for it. Theamount rolled over is taxable later as the new programpays that amount to you. If you roll over amounts intoan IRA, subsequent distributions of these amounts fromthe IRA do not qualify for the capital gain or the 5- or10-year tax option. Capital gain treatment or the 5- or10-year tax option will be regained if the IRA containsonly amounts rolled over from a qualified plan and theseamounts are rolled over from the IRA into a qualifiedretirement plan.

A qualified retirement plan is a qualified pension,profit-sharing, or stock bonus plan, or a qualified an-nuity plan. The CSRS, the FERS, and the TSP areconsidered qualified retirement plans.

Distributions eligible for rollover treatment. If youreceive a refund of your CSRS or FERS contributionswhen you leave government service, you can roll overany interest you receive on the contributions. You can-not roll over any part of your CSRS or FERS annuitypayments.

You can roll over a distribution of any part of yourTSP account balance except:

1) A distribution of your account balance that youchoose to receive in monthly payments over:

a) Your life expectancy, or

b) A period of 10 years or more,

2) A required minimum distribution generally begin-ning at age 701/2, or

3) A declared distribution because of an unrepaidloan, if you have not separated from governmentservice (see Outstanding Loan under Thrift SavingsPlan, earlier).

In addition, a distribution to your beneficiary gener-ally is not treated as an eligible rollover distribution.However, see Qualified domestic relations order andRollover by surviving spouse, later.

Direct rollover option. You can choose to have theOPM or TSP transfer any part of an eligible rolloverdistribution directly to another qualified retirement planthat accepts rollover distributions or to an IRA.

No tax withheld. If you choose the direct rolloveroption, no tax will be withheld from any part of the dis-tribution that is directly paid to the trustee of the otherplan.

Payment to you option. If an eligible rollover distri-bution is paid to you, the OPM or TSP must withhold20% for income tax even if you plan to roll over thedistribution to another qualified retirement plan or IRA.However, the full amount is treated as distributed to youeven though you actually receive only 80%. You mustinclude in income any part (including the part withheld)that you do not roll over within 60 days to anotherqualified retirement plan or to an IRA.

If you leave government service before the calendaryear in which you reach age 55 and are under age591 / 2 when a distribution is paid to you, you may haveto pay an additional 10% tax on any part, including anytax withheld, that you do not roll over. See Tax on EarlyDistributions in Publication 575.

Exception to withholding. Withholding from an el-igible rollover distribution paid to you is not required ifthe distributions for your tax year total less than $200.

Partial rollovers. If you receive a lump-sum distri-bution, it may qualify for capital gain treatment or the5- or 10-year tax option. See Lump-Sum Distributionsin Publication 575. If you roll over any part of the dis-tribution, the part you keep does not qualify for thisspecial tax treatment.

Rolling over more than amount received. If youwant to roll over more of an eligible rollover distributionthan the amount you received after income tax waswithheld, you will have to add funds from some othersource (such as your savings or borrowed amounts).

Example. You left government service at age 53.On February 1, 1999, you receive an eligible rolloverdistribution of $10,000 from your TSP account. TheTSP withholds $2,000, so you actually receive $8,000.If you want to roll over the entire $10,000 to postponeincluding that amount in your income, you will have toget $2,000 from some other source and add it to the$8,000 you actually received. You must complete therollover by April 2, 1999.

If you roll over only $8,000, you must include in your1999 income the $2,000 not rolled over. Also, you maybe subject to the 10% additional tax on the $2,000.

Time for making rollover. You must complete therollover of an eligible rollover distribution by the 60thday following the day on which you receive the distri-bution.

Frozen deposits. If an amount that was distributedto you is deposited in an account from which you cannotwithdraw it, because of either:

1) The bankruptcy or insolvency of any financial insti-tution, or

2) Any requirement imposed by the state in which theinstitution is located because of the bankruptcy orinsolvency (or threat of it) of one or more financialinstitutions in the state,

that amount is considered a “frozen deposit” for theperiod during which you cannot withdraw it.

A special rule extends the period allowed for a tax-free rollover for frozen deposits. The period duringwhich the amount is a frozen deposit is not counted inthe 60-day period allowed for a tax-free rollover to aqualified plan or an IRA. Also, the 60-day period does

not end earlier than 10 days after the deposit is nolonger a frozen deposit. To qualify under this rule, thedeposit must be frozen on at least one day during the60-day rollover period.

Qualified domestic relations order. You may be ableto roll over tax free all or part of a distribution you re-ceive from the CSRS, the FERS, or the TSP under acourt order in a divorce or similar proceeding. You mustreceive the distribution as the government employee'sspouse or former spouse (not as a nonspousal benefi-ciary). The rollover rules apply to you as if you were theemployee. You can roll over the distribution if it is aneligible rollover distribution (described earlier) and it ismade under a qualified domestic relations order(QDRO) or, for the TSP, a qualifying order.

A QDRO is a judgment, decree, or order relating topayment of child support, alimony, or marital propertyrights. The payments must be made to a spouse, formerspouse, child, or other dependent of a participant in theplan. For the TSP, a QDRO can be a qualifying order,but a domestic relations order can be a qualifying ordereven if it is not a QDRO. For example, a qualifyingorder can include an order that requires a TSP paymentof attorney's fees to the attorney for the spouse, formerspouse, or child of the participant.

The order must contain certain information, includingthe amount or percentage of the participant's benefitsto be paid to each payee. It cannot require the plan topay benefits in a form not offered by the plan, nor canit require the plan to pay increased benefits.

A distribution that is paid to a child, dependent, or,if applicable, an attorney for fees, under a QDRO or aqualifying order is taxed to the plan participant.

Rollover by surviving spouse. You may be able toroll over tax free all or part of the CSRS, FERS, or TSPdistribution you receive as the surviving spouse of adeceased employee. The rollover rules apply to you asif you were the employee, except that you can roll overthe distribution only into an IRA. You cannot roll it overinto a qualified retirement plan. A distribution paid to abeneficiary other than the employee's surviving spouseis not an eligible rollover distribution.

How to report. On your Form 1040, report the totaldistributions from the CSRS, FERS, or TSP on line 16a.Report the taxable amount of the distributions minus theamount rolled over, regardless of how the rollover wasmade, on line 16b. If you file Form 1040A, report thetotal distributions on line 11a and the taxable amountminus the amount rolled over on line 11b.

Written explanation to recipients. The TSP or OPMmust provide a written explanation to you within a rea-sonable period of time before making an eligible rolloverdistribution to you. It must tell you about:

1) Your right to have the distribution paid tax free di-rectly to another qualified retirement plan or to anIRA,

2) The requirement to withhold tax from the distribu-tion if it is not paid directly to another qualified re-tirement plan or to an IRA,

3) The nontaxability of any part of the distribution thatyou roll over to another qualified retirement plan orto an IRA within 60 days after you receive the dis-tribution, and

4) If they apply, the other qualified retirement planrules, including those for lump-sum distributions,alternate payees, and cash or deferred arrange-ments.

Reasonable period of time. The TSP or OPM mustprovide you with a written explanation no earlier than90 days and no later than 30 days before the distribu-tion is made. However, you can choose to have a dis-tribution made less than 30 days after the explanationis provided as long as the following two requirementsare met.

1) You must have the opportunity to consider whetheror not you want to make a direct rollover for at least30 days after the explanation is provided.

2) The information you receive must clearly state thatyou have the right to have 30 days to make a de-cision.

Contact the TSP or OPM if you have any questionsabout this information.

Choosing the right option. The following comparisonchart may help you decide which distribution option tochoose. Carefully compare the tax effects of each andchoose the option that is best for you.

How To Report BenefitsIf you received annuity benefits that are not fully taxa-ble, report the total received for the year on Form 1040,line 16a, or on Form 1040A, line 11a. Also include onthat line the total of any other pension plan payments(even if fully taxable, such as those from the TSP) thatyou received during the year in addition to the annuity.Report the taxable amount of these total benefits on line16b (Form 1040) or line 11b (Form 1040A). If you useForm 4972, Tax on Lump-Sum Distributions, however,to report the tax on any amount, do not include thatamount on lines 16a and 16b or lines 11a and 11b;follow the Form 4972 instructions.

If you received only fully taxable payments from yourretirement, the TSP, or other pension plan, report on

Form 1040, line 16b, or Form 1040A, line 11b, the totalreceived for the year (except for any amount reportedon Form 4972); no entry is required on line 16a (Form1040) or line 11a (Form 1040A).

Part IIIRules for DisabilityRetirement andCredit for the Elderly orthe DisabledThis part of the publication is for federal employees andretirees who receive disability benefits under the CSRS,the FERS, or other federal programs. It also explainsthe tax credit available to certain taxpayers because ofage or disability.

Disability RetirementIf you retired on disability, the disability pension youreceive from the CSRS or FERS is taxable as wagesuntil you reach minimum retirement age. Beginningon the day after you reach minimum retirement age,your payments are treated as a retirement annuity. Atthat time or at any time thereafter, you can begin torecover the cost of your annuity under the rules dis-cussed in Part II.

If you find that you could have started your recoveryin an earlier year for which you have already filed areturn, you can elect to start your recovery of contribu-tions in that earlier year by filing an amended return forthat year and each succeeding year. Generally, anamended return for any year must be filed within 3years after the due date for filing your original return forthat year.

Minimum retirement age (MRA). This is the age atwhich you could first receive an annuity were you notdisabled. This is generally based on your age andlength of service.

Retirement under the Civil Service RetirementSystem (CSRS). In most cases, under the CSRS, theminimum combinations of age and service for retire-ment are:

• Age 55 with 30 years of service,

• Age 60 with 20 years of service,

• Age 62 with 5 years of service, and

• For law enforcement, firefighter, or air traffic con-troller service, age 50 with 20 years of coveredservice.

Retirement under the Federal Employees Retire-ment System (FERS). Your MRA under the FERS isbetween ages 55 and 57 with at least 10 years of ser-vice. With at least 5 years of service, your MRA cannotbe greater than age 62. Specifically, your MRA with atleast 10 years of service is shown in the following table.

Comparison ChartDirect Rollover Payment To You

No withholding. Payer must withhold income tax of 20% on the taxablepart even if you roll it over to another plan or to an IRA.

No 10% additionaltax.

If you are under age 591/2, a 10% additional tax mayapply to the taxable part, including the tax withheld, thatyou do not roll over.

Not income untillater distributed toyou from the otherplan or the IRA.

Taxable part, including the tax withheld, is income if notrolled over.

Not eligible forcapital gain or5- or 10-yeartax option. *

May be eligible for capital gain treatment or the 5- or10-year tax option if no part is rolled over.

*May be eligible for capital gain treatment or the 5- or 10-year tax option whenlater distributed to you from the plan that accepts the rollover.

How to report. You must report all your disabilitypayments received before minimum retirement age online 7 (Form 1040 or Form 1040A).

Withholding. For income tax withholding purposes, adisability annuity is treated the same as a nondisabilityannuity. This treatment also applies to disability pay-ments received before minimum retirement age whenthese payments are shown as wages on your return.See Tax Withholding and Estimated Tax in Part I, ear-lier.

Credit for the Elderly or the DisabledYou can take the credit for the elderly or the disabledif:

1) You are a qualified individual , and

2) Your income is not more than certain limits.

You are a qualified individual for this credit if you area U.S. citizen or resident and, at the end of the tax year,you are:

1) Age 65 or older, or

2) Under age 65 and you—

a) Retired on permanent and total disability,

b) Received taxable disability income, and

c) Did not reach mandatory retirement age (ex-plained later) before the beginning of the taxyear.

You are retired on permanent and total disability ifyou were permanently and totally disabled when youretired, and you retired on disability before the close ofthe tax year. If you retired on disability before 1977 butyou were not permanently and totally disabled at thetime you retired, you can qualify for the credit if youwere permanently and totally disabled on January 1,1976, or January 1, 1977.

Permanently and totally disabled. You are perma-nently and totally disabled if you cannot engage in anysubstantial gainful activity because of your physical ormental condition. A physician must certify that yourcondition is expected to result in death or has lasted,or can be expected to last, continuously for 12 monthsor more. Substantial gainful activity is the perform-ance of significant duties over a reasonable period oftime while working for pay or profit, or in work generallydone for pay or profit.

If you were born in Your MRA is Mandatory retirement age. This is the age set by youremployer at which you must retire. There is no man-datory retirement age for most federal employees.However, there is a mandatory retirement age for thefollowing employees.

1) An air traffic controller appointed after May 15,1972, by the Department of Transportation or theDepartment of Defense generally must retire by thelast day of the month in which he or she reachesage 56.

2) A firefighter employed by the U.S. Government whois otherwise eligible for immediate retirement gen-erally must retire by the last day of the month inwhich he or she reaches age 55 or, if later, com-pletes 20 years of firefighter service.

3) A law enforcement officer employed by the U.S.Government who is otherwise eligible for immediateretirement generally must retire by the last day ofthe month in which he or she reaches age 57 or, iflater, completes 20 years of law enforcement ser-vice.

Physician's statement. If you are under 65, you musthave your physician complete a statement certifyingthat you are permanently and totally disabled. You mustkeep this statement for your tax records. You can usethe Physician's Statement in the instructions for eitherSchedule R (Form 1040) or Schedule 3 (Form 1040A).

Figuring the credit. If you want the Internal RevenueService to figure your tax and credits, including thecredit for the elderly or the disabled, see Publication967, The IRS Will Figure Your Tax, and the instructionsfor Schedule R (Form 1040) or Schedule 3 (Form1040A).

More information. For detailed information about thiscredit, get Publication 524.

Other BenefitsThe tax treatment of certain other benefits is explainedin this section.

Federal Employees' Compensation Act (FECA).FECA payments you receive for personal injuries orsickness resulting from the performance of your dutiesare like workers' compensation. They are tax exemptand are not treated as disability income or annuities.However, payments you receive while your claim isbeing processed, including pay while on sick leave and“continuation of pay” for up to 45 days, are taxable.

Sick pay or disability payments repaid. If yourepay sick leave or disability payments you received inan earlier year to be eligible for nontaxable FECAbenefits, you can deduct the amount you repay. Youcan claim the deduction whether you repay the amountyourself or have the FECA payment sent directly to youremploying agency or the OPM.

Claim the deduction on Schedule A (Form 1040) asa miscellaneous itemized deduction, subject to the2%-of-adjusted-gross-income limit. It is considered abusiness loss and may create a net operating loss if

1947 or earlier ......... 55 years1948 ........................ 55 years, 2 months1949 ........................ 55 years, 4 months1950 ........................ 55 years, 6 months1951 ........................ 55 years, 8 months1952 ........................ 55 years, 10 months1953 to 1964 ........... 56 years1965 ........................ 56 years, 2 months1966 ........................ 56 years, 4 months1967 ........................ 56 years, 6 months1968 ........................ 56 years, 8 months1969 ........................ 56 years, 10 months1970 or later ............ 57 years

your deductions for the year are more than your incomefor the year. Get Publication 536, Net OperatingLosses, for more information. The repayment is not el-igible for the special tax credit that applies to repay-ments over $3,000 of amounts received under a claimof right.

If you repay sick leave or disability payments in thesame year you receive them, the repayment reducesthe taxable sick pay or disability benefits you include inincome. Do not deduct it separately.

Terrorist attack. Disability benefits you receive for in-juries resulting from a violent attack are tax exempt andare not treated as disability income or annuities if:

1) The attack took place while you were a federalemployee performing official duties outside theUnited States, and

2) The Secretary of State determines it to have beena terrorist attack.

Disability resulting from military service injuries.If you received tax-exempt benefits from the Depart-ment of Veterans Affairs for personal injuries resultingfrom active service in the armed forces and later receiveCSRS or FERS disability payments for disability arisingfrom the same injuries, you cannot treat the disabilitypayments as tax-exempt income. They are treated asa disability pension or annuity subject to the rules de-scribed earlier.

Payment for annual leave. When you retire, any pay-ment for your unused annual leave is taxed as a salarypayment. It is not treated as disability or annuity pay,but is taxed as wages in the tax year you receive thepayment.

Part IVRules for Survivorsof Federal EmployeesThis part of the publication is for survivors of federalemployees. It explains how to treat amounts you re-ceive because of the employee's death. If you are thesurvivor of a federal retiree, see Part V.

Employee earnings. Salary or wages earned by afederal employee but paid to the employee's survivoror beneficiary after the employee's death are “incomein respect of the decedent.” This income is taxable tothe survivor or beneficiary. This treatment also appliesto payments for accrued annual leave.

Dependents of public safety officers. The deathbenefit payable to surviving dependents of public safetyofficers (law enforcement officers or firefighters) whodie in the performance of duty is not taxable. The ben-efit applies to public safety officers who died from inju-ries sustained after September 28, 1976, and is ad-ministered through the Bureau of Justice Assistance.

The Bureau may pay the surviving dependents atemporary benefit up to $3,000 if it finds that the death

of a public safety officer is one for which a final benefitwill probably be paid. If there is no final payment, therecipient of the temporary benefit is liable for repay-ment. However, the Bureau may not require all or partof the repayment if it will cause a hardship. If that hap-pens, that amount is tax free.

The death benefit is not includible in the decedent'sgross estate for federal estate tax purposes.

Death Benefit ExclusionIf the employee died before August 21, 1996, you canexclude from income up to $5,000 paid to you as ben-eficiary of the employee because of his or her death.The maximum total exclusion is $5,000 regardless ofthe number of employers paying death benefits or thenumber of beneficiaries. If more than one person isentitled to death benefits, they must allocate the $5,000exclusion among themselves in proportion to the rela-tive value of their benefits.

CAUTION!

The exclusion does not apply if the employeedied after August 20, 1996 .

The exclusion applies to the benefits you receivefrom the CSRS and FERS. It also applies to benefitsyou receive from the TSP if the employee's entire ac-count balance is paid to the beneficiaries within thesame calendar year. See Thrift Savings Plan, later.

The exclusion is treated as additional contributionsby the employee. Add the amount of the allowable ex-clusion to the employee's unadjusted cost in figuringyour tax-free benefits.

FERS Death Benefit You may be entitled to a special FERS death benefit ifyou were the spouse of an active FERS employee whodied after at least 18 months of federal service. At youroption, you can take the benefit in the form of a singlepayment or in the form of a special annuity payable overa 3-year period.

The tax treatment of the special death benefit de-pends on the option you choose and whether a FERSsurvivor annuity is also paid.

If you choose the single payment option, use thefollowing rules.

1) If a FERS survivor annuity is not paid, at least partof the special death benefit is tax free. The tax-freepart is an amount equal to the employee's FERScontributions (plus any allowable death benefit ex-clusion allocated to that benefit).

2) If a FERS survivor annuity is paid, all of the specialdeath benefit is taxable. You cannot allocate anyof the employee's FERS contributions (or any al-lowable death benefit exclusion) to the specialdeath benefit.

If you choose the 3-year annuity option, at leastpart of each monthly payment is tax free. Use the fol-lowing rules.

1) If a FERS survivor annuity is not paid, the tax-freepart of each monthly payment is an amount equalto the employee's FERS contributions (plus any al-

lowable death benefit exclusion allocated to thespecial death benefit) divided by 36.

2) If a FERS survivor annuity is paid, allocate theemployee's FERS contributions (plus any allowabledeath benefit exclusion allocated to the FERSbenefits) between the 3-year annuity and the sur-vivor annuity. Make the allocation in the same pro-portion that the expected return from each annuitybears to the total expected return from both annui-ties. Divide the amount allocated to the 3-year an-nuity by 36. The result is the tax-free part of eachmonthly payment of the 3-year annuity.

CSRS or FERS Survivor AnnuityIf you receive a CSRS or FERS survivor annuity, youcan recover the employee's cost tax free. The employ-ee's cost is the total of the retirement plan contributionsthat were taken out of his or her pay. If the employeedied before August 21, 1996, see Death Benefit Exclu-sion, earlier.

How you figure the tax-free recovery of the cost de-pends on your annuity starting date . This is the dayafter the date of the employee's death. The methods touse are the same as those described near the begin-ning of Part II under Recovering your cost tax free.

The following discussions cover only the SimplifiedMethod. You can use this method if your annuitystarting date is after July 1, 1986. You must use thismethod if your annuity starting date is after November18, 1996. Under the Simplified Method, each of yourmonthly annuity payments is made up of two parts: thetax-free part that is a return of the employee's cost, andthe taxable balance. The tax-free part remains thesame, even if your annuity is increased. However, seeExclusion limit, later.

Surviving spouse with no children receiving annui-ties. Under the Simplified Method, you figure the tax-free part of each full monthly payment by dividing yourcost by a number of months based on your age. Thisnumber will differ depending on whether your annuitystarting date is on or before November 18, 1996, orlater. To use the Simplified Method, complete theworksheet in Table 1, near the end of this publication.Specific instructions for Table 1 are given in Part II un-der Simplified Method.

Example. Diane Greene, age 48, began receivinga $1,500 monthly CSRS annuity in March 1998 uponthe death of her husband. Her husband was a federalemployee when he died. She received 10 payments in1998. Her husband had contributed $36,000 to the re-tirement plan.

Diane must use the Simplified Method. Her com-pleted worksheet (Table 1) is shown on the next page.To complete line 3, she used Table 1 at the bottom ofthe worksheet and found the number in the last columnopposite the age range that includes her age. Dianekeeps a copy of the completed worksheet for her rec-ords. It will help her figure her taxable annuity in lateryears.

Diane's tax-free monthly amount is $100 (line 4 of theworksheet). If she lives to collect more than 360 pay-ments, the payments after the 360th will be fully taxa-

ble. If she dies before 360 payments have been made,a miscellaneous itemized deduction (not subject to the2%-of-adjusted-gross-income limit) will be allowed forthe unrecovered cost on her final income tax return.

Surviving spouse with child. If the survivor benefitsinclude both a life annuity for the surviving spouse andone or more temporary annuities for the employee'schildren, an additional step is needed under the Sim-plified Method to allocate the monthly exclusion amongthe beneficiaries correctly.

Figure the total monthly exclusion for all beneficiariesby completing lines 2 through 4 of the worksheet inTable 1 as if only the surviving spouse received anannuity. Then, to figure the monthly exclusion for eachbeneficiary, multiply line 4 of the worksheet by a frac-tion. For any beneficiary, the numerator of the fractionis that beneficiary's monthly annuity, and the denomi-nator of the fraction is the total of the monthly annuitypayments to all the beneficiaries.

The ending of a child's temporary annuity does notaffect the total monthly exclusion figured under theSimplified Method. The total exclusion merely needs tobe reallocated at that time among the remaining bene-ficiaries. If only the surviving spouse is left drawing anannuity, the surviving spouse is entitled to the entiremonthly exclusion as figured in the worksheet.

Example. Assume the same facts as in the DianeGreene example, earlier, except that the Greenes hada son, David, who was age 15 at the time of his father'sdeath. David is entitled to a $500 per month temporaryannuity until he reaches age 18 (age 22, if he remainsa full-time student and does not marry).

In completing the Simplified Method Worksheet,Diane fills out the entries through line 4 exactly asshown in the earlier example. That is, she includes online 1 only the amount of the annuity she herself re-ceived and she uses on line 3 the 360 factor for herage. After arriving at the $100 monthly exclusion on line4, however, Diane allocates it between her own annuityand that of her son.

To find how much of the monthly exclusion to allo-cate to her own annuity, Diane multiplies the $100monthly exclusion by the fraction $1,500 (her monthlyannuity) over $2,000 (the total of her $1,500 andDavid's $500 annuities). She enters the result, $75, justbelow the entry space for line 4. She completes theworksheet by entering $750 on lines 5 and 8 and$14,250 on line 9.

A second worksheet is completed for David's annu-ity. On line 1, he enters $5,000 as the total annuityreceived. Lines 2, 3, and 4 are the same as those onhis mother's worksheet. In allocating the $100 monthlyexclusion on line 4 to his annuity, David multiplies it bythe fraction $500 over $2,000. His resulting monthlyexclusion is $25. His exclusion for the year (line 8) is$250 and his taxable annuity for the year (line 9) is$4,750.

Diane and David only need to complete lines 10 and11 on a single worksheet to keep track of their unre-covered cost for next year. These lines are exactly asshown in the earlier example.

When David's temporary annuity ends, the compu-tation of the total monthly exclusion will not change. The

Table 1.


10.

1.



3.



5.





9.

Add lines 6 and 8



$

$

$







55 or under56–6061–6566–7071 or older

300260240170120

360310260210160



410360310260210

15,000

36,000

360

100

1,000

0

36,000

1,000

14,000

1,000

35,000

only difference will be that Diane will then claim the fullexclusion against her annuity alone.

Annuity for a surviving child only. A method similarto the Simplified Method also can be used to figure thetaxable and nontaxable parts of a temporary annuity (orannuities) for one or more surviving children when thereis no surviving spouse annuity. To use this method,divide the deceased employee's cost by the numberof months from the child's annuity starting date until thedate the child will reach age 22. The result is themonthly exclusion. (But the monthly exclusion cannotbe more than the monthly annuity payment. You cancarry over unused exclusion amounts to apply againstfuture annuity payments.).

More than one child. If there is more than one childentitled to a temporary annuity (and no survivingspouse annuity), divide the cost by the number ofmonths of payments until the date the youngest childwill reach age 22. This monthly exclusion must then beallocated among the children in proportion to theirmonthly annuity payments, like the exclusion shown inthe previous example.

Disabled child. If a child otherwise entitled to atemporary annuity was permanently disabled at theannuity starting date (and there is no surviving spouseannuity), that child is treated for tax purposes as re-ceiving a lifetime annuity, like a surviving spouse. Thechild must complete line 3 of the Simplified MethodWorksheet using a number in Table 1 at the bottom ofthe worksheet corresponding to the child's age at theannuity starting date. If another child (or children) is alsoentitled to a temporary annuity, an allocation like theone shown under Surviving spouse with child, earlier,must be made to determine each child's share of theexclusion.

Exclusion limit. If your annuity starting date is after1986, the most that can be recovered tax free is thecost of the annuity. Once the total of your exclusionsequals the cost when annuity payments began, yourentire annuity is taxable. If your annuity starting date isbefore 1987, the tax-free part of each whole monthlypayment remains the same each year you receivepayments—even if you outlive the number of monthsused on line 3 of the Simplified Method Worksheet. Thetotal exclusion may be more than the cost of the an-nuity.

Deduction of unrecovered cost. If the annuity startingdate is after July 1, 1986, and death occurs before allthe cost is recovered tax free, the unrecovered cost canbe claimed as a miscellaneous itemized deduction (notsubject to the 2%-of-adjusted-gross-income limit) forthe beneficiary's last tax year.

Survivors of Slain Public Safety OfficersGenerally, if you receive a survivor annuity as thespouse, former spouse, or child of a public safety officerkilled after 1996 in the line of duty, you can exclude itfrom your gross income. The annuity is excludable tothe extent that it is due to the officer's service as apublic safety officer. Public safety officers include policeand law enforcement officers, fire fighters, ambulance

crews, and rescue squads. The exclusion does notapply if your actions were a substantial contributingfactor to the death of the officer. It also does not applyif:

• The death was caused by the intentional misconductof the officer or by the officer's intention to causehis or her own death,

• The officer was voluntarily intoxicated at the timeof death, or

• The officer was performing his or her duties in agrossly negligent manner at the time of death.

CAUTION!

The special death benefit paid to the spouse ofa FERS employee (see FERS Death Benefit,earlier) is not eligible for this exclusion.

Lump-Sum CSRS or FERS PaymentIf a federal employee dies before retiring and leavesno one eligible for a survivor annuity, the estate or otherbeneficiary will receive a lump-sum payment from theCSRS or FERS. This single payment is made up of theregular contributions to the retirement fund plus accruedinterest, if any, to the extent not already paid to theemployee.

The beneficiary is taxed, in the year a lump sum isdistributed or made available, only on the amount ofany accrued interest. The payment of the employee'scontributions to the fund is not taxed.

Lump-sum payment at end of survivor annuity. Ifan annuity is paid to the federal employee's survivorand the survivor annuity ends before an amount equalto the deceased employee's contributions plus any in-terest has been paid out, the rest of the contributionsplus any interest will be paid in a lump sum to the em-ployee's estate or other beneficiary. Generally, thisbeneficiary will not have to include any of the lump sumin gross income because, when it is added to theamount of the annuity previously received that wasexcludable, it still will be less than the employee's totalcontributions (plus any death benefit exclusion, if it ap-plied).

To figure the taxable amount, if any, use thefollowing worksheet.

Lump-Sum Payment at End of Survivor Annuity

Enter the lump-sum paymentEnter the tax-free annuity paymentspreviously receivedAdd lines 1 and 2Enter the employee’s total cost

1.2.

3.4.

Taxable amount. Subtract line 4 fromline 3. Enter the result, but not less thanzero

5.

$

Example. At the time of your brother's death inDecember 1997, he was employed by the federal gov-ernment and had contributed $45,000 to the CSRS. Hiswidow received $6,600 in survivor annuity paymentsbefore she died in 1998. She had used the Simplified

Method for reporting her annuity and properly excluded$1,000 from gross income.

Since only $6,600 of the guaranteed amount of$45,000 (your brother's contributions) was paid as anannuity, the balance of $38,400 was paid to you in alump sum as your brother's sole beneficiary. You figurethe taxable amount of this payment as follows.

Enter the lump-sum paymentEnter the tax-free annuity paymentspreviously receivedAdd lines 1 and 2Enter the employee’s total cost

1.2.

3.4.

$

5. Taxable amount. Subtract line 4 fromline 3. Enter the result, but not less thanzero

Lump-Sum Payment at End of Survivor Annuity38,000

1,00039,00045,000

0

Voluntary contributions. If a CSRS employee diesbefore retiring from government service, any voluntarycontributions to the retirement fund cannot be used toprovide an additional annuity to the survivors. Instead,the voluntary contributions plus any accrued interestwill be paid in a lump sum to the estate or other bene-ficiary. The beneficiary reports this payment minus theemployee's total voluntary contributions as income forthe year distributed or made available. This excess mayqualify for capital gain treatment or the 5- or 10-year taxoption.

Generally, the taxable part of a lump-sum distributionfrom active participation in a year before 1974 mayqualify for capital gain treatment. The part from activeparticipation after 1973 is taxed as ordinary income.The beneficiary can choose to have this distributiontaxed under the 5- or 10-year tax option. This treatmentapplies only if:

1) Regular annuity benefits cannot be paid under thesystem, and

2) The beneficiary also receives a lump-sum paymentof the compulsory contributions plus interest withinthe same tax year as the voluntary contributions.

For more information, see Lump-Sum Distributions inPublication 575.

Thrift Savings PlanThe payment you receive as the beneficiary of a dece-dent's Thrift Savings Plan (TSP) account is fully taxable.However, if you are the decedent's surviving spouse,you generally can roll over the payment to an IRA taxfree. (You cannot make a rollover to another qualifiedplan.) If you do not choose a direct rollover of the de-cedent's TSP account, mandatory 20% income taxwithholding will apply. For more information, seeRollover Rules, in Part II. If you are not the survivingspouse, the payment is not eligible for rollover treat-ment. The TSP will withhold 10% of the payment forincome tax, unless you give the TSP a Form W-4P tochoose not to have tax withheld.

If the entire TSP account balance is paid to thebeneficiaries in the same calendar year, the payments

might qualify for the 5- or 10-year tax option. SeePublication 575 for details. Also see Important Tax In-formation About Thrift Savings Plan Death BenefitPayments (Rev. March 1998), which is available fromthe TSP.

The above TSP document is also available onthe Internet at www.tsp.gov . Select “Formsand Publications” and then select “Other Docu-

ments.”

Federal Estate TaxForm 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed for theestate of a citizen or resident of the United States whodied in 1998 if the gross estate is more than $625,000.Included in this $625,000 are any taxable gifts madeby the decedent after 1976, and the specific exemptionallowed for gifts by the decedent after September 8,1976, and before 1977.

The gross estate generally includes the value of allproperty beneficially owned by the decedent at the timeof death. Examples of property included in the grossestate are salary or annuity payments that had accruedto an employee or retiree, but which were not paid be-fore death, and the balance in the decedent's TSP ac-count.

The gross estate usually also includes the value ofthe death and survivor benefits payable under theCSRS or the FERS. If the federal employee died leav-ing no one eligible to receive a survivor annuity, thelump sum (representing the employee's contribution tothe system plus any accrued interest) payable to theestate or other beneficiary is included in the employee'sgross estate.

Marital deduction. The estate tax marital deduction isa deduction from the gross estate of the value of prop-erty that is included in the gross estate but that passes,or has passed, to the surviving spouse. Generally, thereis no limit on the amount of the marital deduction.Community property passing to the surviving spousequalifies for the marital deduction.

More information. For more information, get Publica-tion 950, Introduction to Estate and Gift Taxes, andPublication 559, Survivors, Executors, and Administra-tors.

Part VRules for Survivorsof Federal RetireesThis part of the publication is for survivors of federalretirees. It explains how to treat amounts you receivebecause of the retiree's death.

Decedent's retirement benefits. Retirement benefitsaccrued and payable to a CSRS or FERS retiree beforedeath, but paid to you as a survivor, are taxable in thesame manner and to the same extent these benefits

would have been taxable had the retiree lived to receivethem.

CSRS or FERSSurvivor AnnuityCSRS or FERS annuity payments you receive as thesurviving spouse of a federal retiree are fully taxableor are partly taxable under either the General Rule orthe Simplified Method.

Cost recovered. If the retiree reported the annuityunder the Three-Year Rule and recovered tax free allof his or her cost before dying, your survivor annuitypayments are fully taxable. This is also true if theretiree had an annuity starting date after 1986, reportedthe annuity under the General Rule or the SimplifiedMethod, and had fully recovered his or her cost tax free.

General Rule. If the retiree was reporting the annuityunder the General Rule, use the same exclusion per-centage that the retiree used. Apply the exclusion per-centage to the amount specified as your survivor an-nuity at the retiree's annuity starting date. Do not applythe exclusion percentage to any cost-of-living increasesmade after that date. Those increases are fully taxable.For more information about the General Rule, getPublication 939.

Simplified Method. If the retiree was reporting theannuity under the Simplified Method, your monthly tax-free amount is the same as the retiree's monthly ex-clusion (from line 4 of the Simplified Method Work-sheet). This amount remains fixed even if the monthlypayment is increased or decreased. A cost-of-living in-crease in your survivor annuity payments does notchange the amount you can exclude from gross in-come.

Exclusion limit. If the retiree's annuity starting datewas before 1987, you can exclude the tax-free amountfrom all the annuity payments you receive. This in-cludes any payments received after you recover theannuity cost tax free.

If the retiree's annuity starting date is after 1986, youcan exclude a tax-free amount only until you recover theannuity cost tax free. The annuity payments you receiveafter you recover the annuity cost tax free are fullytaxable.

Surviving spouse with child. If the survivor benefitsinclude both a life annuity for the surviving spouse andone or more temporary annuities for the retiree's chil-dren, the tax-free monthly amount that would otherwiseapply to the life annuity must be allocated among thebeneficiaries. To figure the tax-free monthly amount foreach beneficiary, multiply it by a fraction. The numer-ator of the fraction is the beneficiary's monthly annuity,and the denominator of the fraction is the total of themonthly annuity payments to all the beneficiaries.

Example. John retired in 1996 and began receivinga $1,147 per month CSRS retirement annuity with asurvivor annuity payable to his wife, Kate, upon hisdeath. He chose to report his annuity using the Simpli-

fied Method. Under that method, $150 of each paymenthe received was a tax-free recovery of his $45,000 cost.John received a total of 22 monthly payments and re-covered $3,300 of his cost tax free before his death in1998. At John's death, Kate began receiving an annuityof $840 per month and their children, Sam and Lou,began receiving temporary annuities of $330 each permonth. Kate must allocate the $150 tax-free monthlyamount among the three annuities.

Kate allocates $84 ($150 × $840/$1,500) of the tax-free monthly amount to her annuity and $33 ($150 ×$330/$1,500) to each child's annuity. Beginning themonth in which either child is no longer eligible for anannuity, she will reallocate $108 ($150 × $840/$1,170)of the $150 tax-free monthly amount to her annuity and$42 ($150 × $330/$1,170) to the other child's annuity.

Annuity for surviving child only. If the survivorbenefits include only a temporary annuity for theretiree's child, allocate the unrecovered cost over thenumber of months from the date the annuity started untilthe child reaches age 22. If more than one temporaryannuity is paid, allocate the cost over the number ofmonths until the youngest child reaches age 22, andallocate the tax-free monthly amount among the annu-ities in proportion to the monthly annuity payments.

Death Benefit ExclusionIf the retiree died before August 21, 1996, you canexclude from income up to $5,000 paid to you as ben-eficiary of the retiree because of his or her death.

The exclusion applies to benefits you receive in alump sum from CSRS or FERS. It also applies to anytemporary CSRS or FERS annuity paid to the retiree'schild. It does not generally apply to benefits you receivefrom the retiree's TSP account or to a CSRS or FERSsurvivor annuity you receive as the retiree's survivingspouse.

The maximum total exclusion is $5,000 regardlessof the number of former employers paying death ben-efits or the number of beneficiaries. If more than oneperson is entitled to death benefits, they must allocatethe $5,000 exclusion among themselves in proportionto the relative value of their benefits. The exclusion al-located to a child's temporary annuity benefit is treatedas additional cost. It is recovered tax free in the sameway that the actual cost would be recovered if the sur-vivor benefits included only the temporary annuity. SeeAnnuity for surviving child only under CSRS or FERSSurvivor Annuity, earlier.

Survivors of disability retirees. If you are receivinga CSRS or FERS survivor annuity as either the spouseor child of an employee who died after retiring on dis-ability but before reaching the employee's minimumretirement age (explained next), the death benefit ex-clusion will apply to your survivor annuity. Use the al-lowable death benefit exclusion to increase your costof the contract in the same manner as if the retiree haddied while still a federal employee. See Death BenefitExclusion in Part IV.

Minimum retirement age. This is the age at whicha person would first be eligible to receive an annuitywithout regard to disability.

Lump-Sum CSRS or FERS PaymentIf a deceased retiree has no beneficiary eligible to re-ceive a survivor annuity, the retiree's unrecoveredCSRS or FERS contributions plus accrued interest, ifany, will be paid in a lump sum to the estate or otherbeneficiary. The estate or other beneficiary will rarelyhave to include any part of the lump sum in gross in-come. The taxable amount is figured as follows.

Enter the amount of the lump-sumpaymentEnter the amount of annuity receivedtax-free by the retireeAdd line 1 and line 2Enter the total contributions

1.

2.

3.4.

$

5. Taxable amount. Subtract line 4 fromline 3. Enter the result, but not less thanzero

Lump-Sum Payment to Estate or Other Beneficiary

The taxable amount, if any, may qualify for capitalgain treatment or the 5- or 10-year tax option. Gener-ally, that part of a lump-sum distribution from activeparticipation in a year before 1974 may qualify forcapital gain treatment, while the part from active par-ticipation after 1973 is taxed as ordinary income. Thebeneficiary can choose to have this ordinary incomepart taxed under the 5- or 10-year tax option. If thebeneficiary also receives a lump-sum payment of un-recovered voluntary contributions plus interest, thistreatment applies only if the payment is received withinthe same tax year. For more information, see Lump-Sum Distributions in Publication 575.

Voluntary ContributionsIf you receive an additional survivor annuity benefit fromvoluntary contributions to the CSRS, treat it separatelyfrom the annuity that comes from regular contributions.If, before death, the retiree was receiving additionalannuity payments from voluntary contributions and wasreporting them under the General Rule, use the retiree'sexclusion percentage. Apply the exclusion percentageto your additional survivor annuity benefits as of theretiree's annuity starting date. If the retiree was report-ing the payments under the Simplified Method, use thesame monthly exclusion amount that the retiree used.If the annuity starting date was after 1986, the totalexclusion is limited to the amount of the voluntary con-tributions. After the total of these contributions has beenrecovered tax free, the additional annuity payments arefully taxable.

Each year you will receive Form CSF 1099R, State-ment of Survivor Annuity Paid, that will show how muchof your total annuity received in the past year was fromeach type of benefit.

Lump-sum payment. If at the time of the retiree'sdeath there was no one eligible to receive a survivorannuity, the retiree's unrecovered voluntary contribu-tions plus any interest will be paid in a lump sum to theestate or other beneficiary. Part of the lump-sum pay-ment may be taxable to the beneficiary. To figure thetaxable amount, add the lump-sum payment to any

tax-free amounts received by the retiree and subtractthe retiree's total voluntary contributions. The excess,if any, is taxable. See Lump-Sum CSRS or FERSPayment, earlier.

Thrift Savings PlanIf you receive a payment from the TSP account of adeceased federal retiree, the payment is fully taxable.However, if you are the retiree's surviving spouse, yougenerally can roll over the otherwise taxable paymentto an IRA tax free. (You cannot make a rollover to an-other qualified plan.) For more information, seeRollover Rules in Part II, earlier. If you are not the sur-viving spouse, the payment is not eligible for rollovertreatment.

If the retiree chose to receive his or her accountbalance as an annuity, the payments you receive as theretiree's survivor are fully taxable when you receivethem, whether they are received as annuity paymentsor as a cash refund of the remaining value of theamount used to purchase the annuity.

Federal Estate TaxA federal estate tax return may have to be filed for theestate of the retired employee. See Federal Estate Taxin Part IV.

Income Tax Deductionfor Estate Tax Paid Any income that a decedent had a right to receive andcould have received had death not occurred and thatwas not properly includible in the decedent's final in-come tax return is treated as income in respect of adecedent. This includes retirement benefits accruedand payable to a retiree before death, but paid to youas a survivor.

If you are required to include income in respect of adecedent in gross income for any tax year, you candeduct for the same tax year the portion of the federalestate tax imposed on the decedent's estate that is fromthe inclusion in the estate of the right to receive thatamount. For this purpose, if the decedent died after theannuity starting date, the taxable portion of a survivorannuity you receive (other than a temporary annuity fora child) is considered income in respect of a decedent.

The federal estate tax you can deduct is determinedby comparing the actual federal estate tax and the taxthat would have been paid if the income in respect ofthe decedent were not included in the gross estate.

Income tax deductions for the estate tax on the valueof your survivor annuity will be spread over the periodof your life expectancy. The deductions cannot be takenbeyond your life expectancy. Moreover, if you shoulddie before the end of this period, there is no compen-sating adjustment for the unused deductions.

If the income in respect of the decedent is ordinaryincome, the estate tax must be deducted as a miscel-laneous itemized deduction (not subject to the2%-of-adjusted-gross-income limit).

For more information, see Income in Respect of theDecedent in Publication 559, Survivors, Executors, andAdministrators.

How To Get More InformationYou can order free publications and forms, ask taxquestions, and get more information from the IRS inseveral ways. By selecting the method that is best foryou, you will have quick and easy access to tax help.

Free tax services. To find out what services areavailable, get Publication 910, Guide to Free Tax Ser-vices. It contains a list of free tax publications and anindex of tax topics. It also describes other free tax in-formation services, including tax education and assist-ance programs and a list of TeleTax topics.

Personal computer. With your personal com-puter and modem, you can access the IRS onthe Internet at www.irs.ustreas.gov . While

visiting our Web Site, you can select:

• Frequently Asked Tax Questions to find answers toquestions you may have.

• Fill-in Forms to complete tax forms on-line.

• Forms and Publications to download forms andpublications or search publications by topic orkeyword.

• Comments & Help to e-mail us with commentsabout the site or with tax questions.

• Digital Dispatch and IRS Local News Net to receiveour electronic newsletters on hot tax issues andnews.

You can also reach us with your computer using anyof the following.

• Telnet at iris.irs.ustreas.gov

• File Transfer Protocol at ftp.irs.ustreas.gov

• Direct dial (by modem) 703–321–8020

TaxFax Service. Using the phone attached toyour fax machine, you can receive forms, in-structions, and tax information by calling

703–368–9694. Follow the directions from the prompts.When you order forms, enter the catalog number for theform you need. The items you request will be faxed toyou.

Phone. Many services are available by phone.

• Ordering forms, instructions, and publica-tions. Call 1–800–829–3676 to order currentand prior year forms, instructions, and pub-lications.

• Asking tax questions. Call the IRS with yourtax questions at 1–800–829–1040.

• TTY/TDD equipment. If you have access toTTY/TDD equipment, call 1–800–829–4059to ask tax questions or to order forms andpublications.

• TeleTax topics. Call 1–800–829–4477 tolisten to pre-recorded messages coveringvarious tax topics.

Evaluating the quality of our telephone ser-vices. To ensure that IRS representatives giveaccurate, courteous, and professional answers,we evaluate the quality of our telephone ser-vices in several ways.

• A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and does notkeep a record of any taxpayer's name or taxidentification number.

• We sometimes record telephone calls toevaluate IRS assistors objectively. We holdthese recordings no longer than one weekand use them only to measure the qualityof assistance.

• We value our customers' opinions.Throughout this year, we will be surveyingour customers for their opinions on our ser-vice.

Walk-in. You can pick up certain forms, in-structions, and publications at many post of-fices, libraries, and IRS offices. Some libraries

and IRS offices have an extensive collection of productsavailable to print from a CD-ROM or photocopy fromreproducible proofs.

Mail. You can send your order for forms, in-structions, and publications to the DistributionCenter nearest to you and receive a response

7 to 15 workdays after your request is received. Findthe address that applies to your part of the country.

• Western part of U.S.: Western Area Distribution CenterRancho Cordova, CA 95743–0001

• Central part of U.S.: Central Area Distribution CenterP.O. Box 8903Bloomington, IL 61702–8903

• Eastern part of U.S. and foreign addresses:Eastern Area Distribution CenterP.O. Box 85074Richmond, VA 23261–5074

CD-ROM. You can order IRS Publication 1796,Federal Tax Products on CD-ROM, and obtain:

• Current tax forms, instructions, and publi-cations.

• Prior-year tax forms, instructions, and pub-lications.

• Popular tax forms which may be filled-inelectronically, printed out for submission,and saved for recordkeeping.

• Internal Revenue Bulletins.

The CD-ROM can be purchased from NationalTechnical Information Service (NTIS) for $25.00by calling 1–877–233–6767 or for $18.00 on theInternet at www.irs.ustreas. gov/cdorders.The first release is available in mid-Decemberand the final release is available in late January.

Table 1.


10.

1.



3.



5.





9.

Add lines 6 and 8



$

$

$







55 or under56–6061–6566–7071 or older

300260240170120

360310260210160



410360310260210

Table 2.

Enter your lump-sum payment (your cost in the plan at the annuity starting date)1.

Enter the present value of your annuity contract2.


Tax-free part of lump-sum payment. Multiply line 1 by the number on line 3.( Caution: Do not include this amount on line 6 of Table 1 in this publication.)

4.

Taxable part of lump-sum payment/Net cost in the plan. Subtract line 4 from line1. Include this amount in the total on line 16b of Form 1040 or line 11b of Form 1040A.Also, enter this amount on line 2 of Table 1 in this publication

5.

Worksheet for Lump-Sum Payment (Keep For Your Records)

$

See the instructions for the worksheet in Part II under Alternative Annuity Option.

Index

AAlternative annuity option .... 7, 8

Lump-sum payment ............. 7 Simplified Method ................ 7

Where to report .................... 8 Annual leave ...................... 9, 15

Annuity starting date ............... 4 Annuity statement .................... 4

Annuity with survivor benefit . 16Annuity without survivor benefit 5Assistance (See More information)

BBenefits, how to report .......... 13

CChild's temporary annuity ...... 16Community property laws ........ 9Cost (contributions to retirement

plan) ..................................... 4Credit for the disabled ........... 14Credit for the elderly .............. 14

D Death benefit ......................... 15

Death benefit exclusion ... 15, 20Deduction for estate tax ........ 21Deemed deposits, redeposits .. 8

Disability retirement ........... 4, 13 Disabled child ........................ 18 Distributions:Early, additional tax on ........ 9Qualified domestic relations

order ............................... 12Withholding on nonperiodic . 3

E Estate tax ........................ 19, 21 Estimated tax ....................... 2, 3

FFederal Employees' Compen-

sation Act (FECA) .............. 14 Filing requirements .................. 3 Forms:

1099R .................................. 3 5329 ................................. 8, 9

CSA 1099R .......................... 3 CSF 1099R .......................... 4 W-4P-A ................................ 3

Free tax services ................... 22

G General Rule ..................... 7, 20 Gift tax ..................................... 8

HHelp (See More information)

IIncome in respect of a

decedent ............................ 21Income tax withholding ...... 2, 14

LLump-sum CSRS or FERS

payment ....................... 18, 21Lump-sum payment ......... 3, 7, 8

5- or 10-year tax option orcapital gain treatment. ...... 8

Alternative annuity option .... 7 Installments .......................... 8 Simplified Method ................ 7

MMandatory retirement age ..... 14

Marital deduction ................... 19Minimum retirement age . 13, 20

More information ................... 22

NNonresident alien retiree ......... 9

PPermanently and totally disa-

bled .................................... 14 Physician's statement ............ 14

Publications (See Moreinformation)

QQualified domestic relations or-

der ...................................... 12

RReemployment after retirement 9Refund of contributions ........... 2Repayment of contributions .... 4Retirees, rules for .................... 4Retirement during the past

year ...................................... 9 Rollovers ............................ 8, 11

S Simplified Method .............. 5, 20

Substantial gainful activity ..... 14 Survivor annuity ................. 5, 16Choosing or cancelling after

retirement ......................... 5How to report ..................... 16

Survivor of disability retiree ... 20Survivors of federal

employees .......................... 15Survivors of federal retirees .. 19

TTax help (See More information)Tax option, 5- or 10-year ........ 8Thrift Savings Plan ............ 2, 10

TTY/TDD information ............ 22

VVoluntary contributions 9, 19, 21

W Withholding certificate ............. 3

Withholding of income tax . 2, 14 Worksheets:Lump-sum payment (alter-

native annuity option) . 7, 25Lump-sum payment at end

of survivor annuity .......... 18Lump-sum payment to the

estate or otherbeneficiary ...................... 21

Nonresident alien retiree ..... 9 Simplified Method .............. 24

�

Tax Publications for Individual Taxpayers

General Guides

Your Rights as a TaxpayerYour Federal Income Tax (ForIndividuals)Farmer’s Tax GuideTax Guide for Small BusinessTax Calendars for 1999Highlights of 1998 Tax Changes

Guide to Free Tax Services

Specialized Publications

Armed Forces’ Tax GuideFuel Tax Credits and RefundsTravel, Entertainment, Gift, and CarExpensesExemptions, Standard Deduction,and Filing InformationMedical and Dental ExpensesChild and Dependent Care ExpensesDivorced or Separated IndividualsTax Withholding and Estimated TaxEducational ExpensesForeign Tax Credit for IndividualsU.S. Government Civilian EmployeesStationed AbroadSocial Security and OtherInformation for Members of theClergy and Religious WorkersU.S. Tax Guide for AliensScholarships and FellowshipsMoving ExpensesSelling Your HomeCredit for the Elderly or the DisabledTaxable and Nontaxable IncomeCharitable ContributionsResidential Rental Property

Commonly Used Tax Forms

Miscellaneous Deductions

Tax Information for First-TimeHomeownersReporting Tip IncomeSelf-Employment TaxDepreciating Property Placed inService Before 1987Installment SalesPartnershipsSales and Other Dispositions ofAssetsCasualties, Disasters, and Thefts(Business and Nonbusiness)Investment Income and ExpensesBasis of AssetsRecordkeeping for IndividualsOlder Americans’ Tax GuideCommunity PropertyExamination of Returns, AppealRights, and Claims for RefundSurvivors, Executors, andAdministratorsDetermining the Value of DonatedPropertyMutual Fund DistributionsTax Guide for Individuals WithIncome From U.S. PossessionsPension and Annuity IncomeNonbusiness Disaster, Casualty, andTheft Loss WorkbookBusiness Use of Your Home(Including Use by Day-CareProviders)Individual Retirement Arrangements(IRAs) (Including Roth IRAs andEducation IRAs)Tax Highlights for U.S. Citizens andResidents Going AbroadUnderstanding the Collection ProcessEarned Income CreditTax Guide to U.S. Civil ServiceRetirement Benefits

Tax Highlights for Persons withDisabilitiesBankruptcy Tax GuideDirect SellersSocial Security and EquivalentRailroad Retirement BenefitsIs My Withholding Correct for 1999?Passive Activity and At-Risk RulesHousehold Employer’s Tax GuideTax Rules for Children andDependentsHome Mortgage Interest DeductionHow To Depreciate PropertyPractice Before the IRS and Powerof AttorneyIntroduction to Estate and Gift TaxesIRS Will Figure Your Tax

Per Diem RatesReporting Cash Payments of Over$10,000The Problem Resolution Programof the Internal Revenue Service

Derechos del ContribuyenteCómo Preparar la Declaración deImpuesto Federal

Crédito por Ingreso del TrabajoEnglish-Spanish Glossary of Wordsand Phrases Used in PublicationsIssued by the Internal RevenueService

U.S. Tax Treaties

Spanish Language Publications

Tax Highlights for CommercialFishermen

910

595553509334225

171

3378463

501

502503504505508514516

517

519520521523524525526527529

530

531533534

537

544

547

550551552554

541

555556

559

561

564570

575584

587

590

593

594596721

901907

908

915

919925926929

946

911

936

950

1542

967

1544

1546

596SP

1SP

850

579SP

Comprendiendo el Proceso de Cobro594SP

947

Tax Benefits for Adoption968

Informe de Pagos en Efectivo enExceso de $10,000 (Recibidos enuna Ocupación o Negocio)

1544SP

See How To Get More Information for a variety of ways to get forms, including by computer,fax, phone, and mail. For fax orders only, use the catalog numbers when ordering.

U.S. Individual Income Tax ReturnItemized Deductions & Interest andOrdinary Dividends

Profit or Loss From BusinessNet Profit From Business

Capital Gains and LossesSupplemental Income and Loss

Earned Income CreditProfit or Loss From Farming

Credit for the Elderly or the Disabled

Income Tax Return for Single and Joint Filers With No Dependents

Self-Employment TaxU.S. Individual Income Tax Return

Interest and Ordinary Dividends forForm 1040A FilersChild and Dependent CareExpenses for Form 1040A FilersCredit for the Elderly or the Disabled for Form 1040A Filers

Estimated Tax for IndividualsAmended U.S. Individual Income TaxReturn

Unreimbursed Employee BusinessExpenses

Underpayment of Estimated Tax byIndividuals, Estates and Trusts

Power of Attorney and Declarationof Representative

Child and Dependent Care Expenses

Moving ExpensesDepreciation and AmortizationApplication for Automatic Extension of TimeTo File U.S. Individual Income Tax ReturnInvestment Interest Expense DeductionAdditional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities,Modified Endowment Contracts, and MSAsAlternative Minimum Tax–IndividualsNoncash Charitable Contributions

Change of AddressExpenses for Business Use of Your Home

Nondeductible IRAsPassive Activity Loss Limitations

1040Sch A & B

Sch CSch C-EZSch DSch ESch EICSch FSch H Household Employment Taxes

Sch RSch SE

1040EZ

1040ASch 1

Sch 2

Sch 3

1040-ES1040X

2106 Employee Business Expenses2106-EZ

2210

24412848

390345624868

49525329

6251828385828606

88228829

Form Number and TitleCatalogNumber

Sch J Farm Income Averaging

Additional Child Tax Credit8812

Education Credits8863

CatalogNumber

1170020604

11744

1186211980

124901290613141

1317713329

1360062294637046396610644120811323225379

11320

Form Number and Title

11330

113341437411338113441133911346121872551311359113581132712075

10749

12064

11329

1134011360

See How To Get More Information for a variety of ways to get publications,including by computer, phone, and mail.

970 Tax Benefits for Higher Education971 Innocent Spouse Relief

Tax Guide to - Internal Revenue Service

Documents

Transcript of Tax Guide to - Internal Revenue Service