US Internal Revenue Service: p721--2000

8/14/2019 US Internal Revenue Service: p721--2000

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ContentsImportant Change .............................................. 1

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

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

Part II

Rules for Retirees ............................................ 4

Part III

Rules for Disability Retirement and Credit forthe Elderly or the Disabled ....................... 14

Part IV

Rules for Survivors of Federal Employees ...... 16

Part VRules for Survivors of Federal Retirees .......... 21

How To Get Tax Help ......................................... 23

Simplified Method Worksheet ........................... 25

Worksheet for Lump-Sum Payment ................. 26

Index .................................................................... 27

Important Change

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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 annuity

benefits 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, yougenerally could have chosen to use the SimplifiedMethod or the General Rule. See Part II, Rules forRetirees.

Thrift Savings Plan. The Thrift Savings Plan (TSP)provides federal employees with the same savings andtax benefits that many private employers offer their

Department of the TreasuryInternal Revenue Service

Publication 721Cat. No. 46713C

Tax Guide toU.S. Civil

Service

Retirement

Benefits

For use in preparing

2000 Returns


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employees. 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.

Comments and suggestions. We welcome yourcomments about this publication and your suggestions

for future editions.You can e-mail us while visiting our web site at

www.irs.gov/help/email2.html.You can write to us at the following address:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone. Therefore,it would be helpful if you would include your daytimephone number, including the area code, in your corre-spondence.

Useful ItemsYou may want to see:

Publication

524 Credit for the Elderly or the Disabled

575 Pension and Annuity Income

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

939 General Rule for Pensions and Annuities

Form (and Instructions)

CSA 1099R Statement of Annuity Paid

CSF 1099R Statement of Survivor Annuity Paid

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

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

See How To Get Tax Helpnear the end of this pub-lication for information about getting these publicationsand 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 CSRS or FERS and you are noteligible for an immediate annuity, you can choose toreceive a refund of the money in your CSRS or FERSretirement account. The refund will include both regularand voluntary contributions you made to the fund, plusany interest payable.

If the refund includes only your contributions, noneof the refund is taxable. If it includes any interest, theinterest is taxable unless you roll it over into anotherqualified plan or a traditional individual retirement ar-rangement (IRA). If you do not have the Office of Per-sonnel Management (OPM) transfer the interest to an

IRA or other plan in a direct rollover, tax will be withheldat a 20% rate. See Rollover Rules in Part II for infor-mation on how to make a rollover.

If you do not roll over interest included in your refund,it may qualify as a lump-sum distribution eligible forcapital gain treatment or the 10-year tax option. It mayalso be subject to an additional 10% tax on early dis-tributions if you separate from service before the cal-endar year in which you reach age 55. For more infor-mation, see Lump-Sum Distributionsand Tax on EarlyDistributions in Publication 575.

TIP

Interest is not paid on contributions to the CSRSfor service after 1956 unless your service was

for more than 1 year but less than 5 years.Therefore, many employees who withdraw their contri-butions under the CSRS do not get interest and do notowe any tax on their refund.

Tax Withholdingand Estimated TaxThe CSRS or FERS annuity you receive is subject tofederal income tax withholding based on tables pre-pared by the Internal Revenue Service, unless youchoose not to have tax withheld. The Office of Per-sonnel Management will tell you how to make thechoice. The choice for no withholding remains in effectuntil you change it. These withholding rules also applyto a disability annuity, whether received before or afterminimum retirement age.

If you choose not to have tax withheld, or if you donot have enough tax withheld, you may have to makeestimated tax payments.

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-

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mation, including exceptions to the penalty, see chapter4 of Publication 505, Tax Withholding and EstimatedTax.

Form CSA 1099R. Form CSA 1099R is mailed to youby OPM each year. It will show any tax you had with-held. File copy B of Form CSA 1099R with your returnif any federal income tax was withheld.

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 no withholding if you are a U.S. citizenor resident, you must provide OPM with your homeaddress in the United States or its possessions. Oth-erwise, OPM has to withhold tax. For example, OPMmust withhold if you provide a U.S. address for anominee, trustee, or agent (such as a bank) to whomthe benefits are to be delivered, but you do not provideyour own U.S. home address.

You also may choose no withholding if you certify toOPM that you are not a U.S. citizen, a U.S. resident

alien, or someone who left the United States to avoidtax. But if you so certify, you may be subject to the 30%flat rate withholding that applies to nonresident aliens.For details, see Publication 519, U.S.Tax Guide for Al-iens.

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 to

stop withholding, call OPM's Retirement Infor-mation Office at 1-888-767-6738 (customers

within the local Washington, D.C., calling area must call202-606-0500), or call Annuitant Express at1-800-409-6528. If you have TDD equipment, call1-800-878-5707. No special form is needed. You willneed your retirement claim number (CSA or CSF) andyour social security number when you call.

You can also change the amount of withholdingor stop withholding through the Internet atwww.servicesonline.opm.gov. You will need

your retirement claim number (CSA or CSF) and your

Personal Identification Number (PIN). To get a PIN, callthe OPM's Retirement Information Office. (See thepreceding paragraph for telephone numbers.)

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 CSRSor FERS contributions, or you die without leaving asurvivor eligible for an annuity, you or your beneficiarywill receive a distribution of your contributions to theretirement plan plus any interest payable. Tax will bewithheld at a 20% rate on the interest distributed.However, tax will not be withheld on the interest if you

roll it over to a traditional IRA or a qualified plan byhaving OPM transfer it directly to the traditional IRA orother plan. See Rollover Rulesin 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 lump

sum if you roll the taxable part over to a traditional IRAor a qualified plan by having OPM transfer the taxablepart directly to a traditional IRA or other plan.

Withholding from Thrift Savings Plan payments.Generally, a distribution that you receive from the ThriftSavings Plan (TSP) is subject to federal income taxwithholding. The amount withheld is:

20% if the distribution is an eligible rollover distri-bution, or

10% if it is a nonperiodic distribution other than aneligible rollover distribution, or

An amount determined by treating the payment aswages, if it is a periodic distribution.

However, you can usually choose not to have taxwithheld from TSP payments other than eligible rolloverdistributions. By January 31 after the end of the yearin which you receive a distribution, the TSP will issueForm 1099R showing the total distributions you re-ceived in the prior year and the amount of tax 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.

Estimated tax. Generally, you should make estimatedtax payments for 2001 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 income taxreturn for 2001, or

2) The tax shown on your 2000 income tax return(110% of that amount if the adjusted gross incomeshown on the return was more than $150,000($75,000 if your filing status for 2001 will be marriedfiling separately)). The return must cover all 12months.

You do not have to pay estimated tax for 2001 if youwere a U.S. citizen or resident for all of 2000 and youhad no tax liability for the full 12-month 2000 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.

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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.

Form CSF 1099R. By January 31 after the end ofeach tax year, you should receive Form CSF 1099R,which will show the total amount of the annuity youreceived in the past year. It should also separately showthe survivor annuity for a child or children. Only the partthat is each individual's survivor annuity should be

shown on that individual's Form 1040 or 1040A.If your Form CSF 1099R does not separately show

the 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 Payments,showing the amounts paid to you for yourchild(ren), from OPM by calling OPM's Retire-

ment Information Office at 1-888-767-6738 (customerswithin the local Washington, D.C. calling area must call(202) 6060500). You will need your CSF claim num-

ber 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 fromOPM when your CSRS or FERS annuity was approvedshows the commencing date (the annuity startingdate), the gross monthly rateof your annuity benefit,and your total contributions to the retirement plan(your cost). You will use this information to figure thetax-free recovery of your cost.

Annuity starting date. If you retire from federalgovernment service on a regular annuity, your annuitystarting date is the commencing date on your annuity

statement from OPM. If something delays payment ofyour annuity, such as a late application for retirement,it does not affect the date your annuity begins to accrueor your annuity starting date.

Gross monthly rate. This is the amount you wereto get after any adjustment for electing a survivor's an-nuity or for electing the lump-sum payment under thealternative annuity option (if either applied) but beforeany deduction for income tax withholding, insurancepremiums, etc.

Your cost. Your monthly annuity check contains anamount on which you have previously paid income tax.This amount represents part of your contributions to theretirement plan. Even though you did not receive themoney that was contributed to the plan, it was includedin your gross income for federal income tax purposesin the years it was taken out of your pay.

The cost of your annuity is the total of your contri-butions to the retirement plan, as shown on your annuitystatement from OPM. If you elected the alternative an-nuity option, it includes any deemed deposits and anydeemed redeposits that were added to your lump-sumcredit. (See Lump-sum creditunder Alternative AnnuityOption, later.)

If you repaid contributions that you had withdrawnfrom the retirement plan earlier, or if you paid into theplan to receive full credit for service not subject to re-tirement deductions, the entire repayment, includingany interest, is a part of your cost. You cannot claiman interest deduction for any interest payments. Youcannot treat these payments as voluntary contributions;they are considered 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) applies to your annuity.

If your annuity starting date is after July 1, 1986,and before November 19, 1996, you could havechosen to use either the General Rule or the Sim-plified Method.

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

Under both the General Rule and the SimplifiedMethod, each of your monthly annuity payments ismade up of two parts: the tax-free part that is a returnof your cost, and the taxable part that is the amount of

each payment that is more than the part that representsyour cost. The tax-free part is a fixed dollar amount. Itremains the same, even if your annuity is increased.Generally, this rule applies as long as you receive yourannuity. 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-

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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.

Choosing a survivor annuity after retirement. If

you retired without a survivor annuity and report yourannuity under the Simplified Method, do not changeyour tax-free monthly amount even if you later choosea survivor annuity.

If you retired without a survivor annuity and reportyour annuity under the General Rule, you must figurea new exclusion percentage if you later choose a sur-vivor 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. Ifyou notify OPM that your marriage has ended, your

annuity might be increased to remove the reduction fora survivor benefit. The increased annuity does notchange the cost recovery you figured at the annuitystarting date. The tax-free part of each annuity paymentremains the same.

For more information about choosing orcanceling a survivor annuity after retirement,contact OPM's Retirement Information Office at

1-888-767-6738 (in the metropolitan Washington, D.C.area, call 202-606-0500), or call Annuitant Express at1-800-409-6528.

Exclusion limit. If your annuity starting date is after

1986, 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.Annuity payments you or your survivors receive afterthe total cost in the plan has been recovered are fullytaxable.

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 is before 1987, you continue to take your

monthly exclusion figured under the General Rule orSimplified Method for as long as you receive your an-nuity. If you chose a joint and survivor annuity, yoursurvivor continues to take that same exclusion. Thetotal exclusion may 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 the limit on 2% of

adjusted gross income). If your annuity starting date isbefore July 2, 1986, no tax benefit is allowed for anyunrecovered cost at death.

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. (OPM hasfigured the taxable amount of your annuity shown on

your Form CSA 1099R using the Simplified Method.)You could have chosen to use either the SimplifiedMethod or the General Rule if your annuity starting dateis after July 1, 1986, but before November 19, 1996.The Simplified Method does not apply if your annuitystarting date is before July 2, 1986.

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

TIPInstead of Table 1, you can generally use theSimplified Method Worksheet in the instructionsfor Form 1040 or Form 1040A to figure your

taxable annuity. However, you mustuse Table 1 andTable 2 in this publication if you chose the alternativeannuity option. SeeAlternative Annuity Option, later.

Line 2. See the discussion at the beginning of thisPart II for an explanation of your cost in the plan. If yourannuity starting date is after November 18, 1996, andyou chose the alternative annuity option (explainedlater), you must reduce your cost by the tax-free partof the lump-sum payment you received.

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 withouta survivor benefit,or

Table 2 for an annuity witha survivor benefit.

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

Line 6. If you retired before 2000, 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 30, 2000, under an annuity that willprovide a survivor benefit for his wife, Kathy. His annuity

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starting date is May 3, 2000. 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 includes

122 (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, 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.

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 have

chosen to use the General Rule only if you could notuse the Three-Year Rule.Under the General Rule, you figure the tax-free part

of 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.

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 retireeswhose annuity starting date is 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 toretirees with certain life-threatening illnesses or other

critical 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

The lump-sum payment you receive under the alterna-

tive annuity option generally has a tax-free part and ataxable part. The tax-free part represents part of yourcost. The taxable part represents part of the earningson your annuity contract. If your lump-sum credit (dis-cussed later) includes a deemed deposit or redeposit,the taxable amount may be more than the lump-sumpayment. You must include the taxable part of thelump-sum payment in your income for the year you re-ceive the payment unless you roll it over into anotherqualified plan or a traditional IRA. If you do not haveOPM transfer the taxable amount to an IRA or otherplan in a direct rollover, tax will be withheld at a 20%rate. See Rollover Rules, later, for information on howto make a rollover.

CAUTION

!OPM can make a direct rollover only up to the

amount of the lump-sum payment. Therefore,to defer tax on the full taxable amount if it is

more than the payment, you must roll over the differ-ence within 60 days using your own funds.

The taxable part of the lump-sum payment does notqualify as a lump-sum distribution eligible for capitalgain treatment or the 10-year tax option. It may alsobe subject to an additional 10% tax on early distribu-tions if you separate from service before the calendaryear in which you reach age 55. For more information,

see Lump-Sum Distributions and Tax on Early Distri-butionsin Publication 575.

Table 2. Use Table 2, Worksheet for Lump-Sum Pay-ment (near the end of this publication), to figure thetaxable part of your lump-sum payment. Be sure tokeep the completed worksheet for your records.

To complete the worksheet, you will need to knowthe amount of your lump-sum credit and the presentvalue of your annuity contract.

Lump-sum credit. Generally, this is the sameamount as the lump-sum payment you receive (the totalof your contributions to the retirement system and in-

terest on those contributions). However, for purposesof the alternative annuity option, your lump-sum creditmay also include deemed deposits and redeposits thatOPM advanced to your retirement account so that youare given credit for the service they represent. 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 and did not repay. You are treated as if you hadreceived a lump-sum payment equal to the amount ofyour lump-sum credit and then had made a repaymentto OPM of the advanced amounts.

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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 12a

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 years 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 12b.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 wasbefore this yearand you completed this worksheetlast year, skip line 3 and enter the amount from line 4 of last years worksheet on line 4below. Otherwise, go to line 3.

Table 1 for Line 3 Above

AND your annuity starting date wasIF the age atannuity startingdate was. . .

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

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

55 or under56606165667071 or older

300260240170120

360310260210160

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

110 and under111120121130131140141 or older

410360310260210

8,000

24,700

310

80

6 40

0

24,700

6 40

7,360

6 40

24,060

$

Filled-In Table 1 for Bill Kirkland Example

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Present value of your annuity contract. Thepresent value of your annuity contract is figured usingactuarial tables provided by the IRS.

To find out the present value of your annuitycontract, call the IRS Actuarial Branch 1 at202-283-9717 (not a toll-free call).

Example. David Brown retired from the federalgovernment in 2000, one month after his 55th birthday.

He had contributed $31,000 to his retirement plan andchose to receive a lump-sum payment of that amountunder the alternative annuity option. The present valueof his annuity contract was $155,000. Using the Table2 worksheet, he figures the taxable part of the lump-sum payment and his net cost in the plan. That work-sheet is shown on the next page.

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 be

paid 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.

How to report. Add any actual or deemed payment ofyour lump-sum credit (defined earlier) to the total for line16a, Form 1040, or line 12a, Form 1040A. Add thetaxable part to the total for line 16b, Form 1040, or line

12b, Form 1040A, unless you roll over the taxable partto a traditional IRA or a qualified retirement plan.

If you receive the lump-sum payment in two install-ments, include any interest paid with the second in-stallment on line 8a of either Form 1040 or Form 1040A.

Reduced AnnuityIf you have chosen to receive a lump-sum paymentunder the alternative annuity option, you will also re-ceive reduced monthly annuity payments. These an-nuity payments will each have a tax-free and a taxablepart. To figure the tax-free part of each annuity pay-ment, you must use the Simplified Method Worksheet(Table 1). For instructions on how to complete theworksheet, see Table 1 under Simplified Method, ear-lier.

In completing line 2 of Table 1, you must reduce yourcost in the plan by the tax-free part of the lump-sumpayment you received. Enter as your net cost on line2 the amount from line 5 of Table 2. Do notinclude thetax-free part of the lump-sum payment with otheramounts recovered tax free (line 6 of Table 1) whenlimiting your total exclusion to your total cost.

Example. The facts are the same as in the examplefor David Brown in the preceding discussion. In addi-tion, David received 10 annuity payments in 2000 of

$1,200 each. Using the Table 1 worksheet, he figuresthe taxable part of his annuity payments. He completesline 2 by reducing his $31,000 cost by the $6,200 tax-free part of his lump-sum payment. His entry on line 2is his $24,800 net cost in the plan (the amount from line5 of Table 2). He does not include the tax-free part ofhis lump-sum payment on line 6 of Table 1. David'sfilled-in Table 1 worksheet is shown on page 10.

CAUTION!

Reemployment after choosing the alterna-

tive annuity option. If you chose this optionwhen you retired and then you were reem-ployed by the federal government before retiring again,your Form CSA 1099R may show only the amount ofyour contributions to your retirement plan during yourreemployment. If the amount on the form does not in-clude all your contributions, disregard it and use yourtotal contributions to figure the taxable part of your an-nuity payments.

Annuity starting date before November 19, 1996. Ifyour annuity starting date is before November 19, 1996,

and you chose the alternative annuity option, the taxa-ble and tax-free parts of your lump-sum payment andyour annuity payments are figured using different rules.Under those rules, you do notreduce your cost in theplan (line 2 of Table 1) by the tax-free part of thelump-sum payment. However, you must include thattax-free amount with other amounts previously recov-ered tax free (line 6 of Table 1) when limiting your totalexclusion to your total cost.

Federal Gift TaxIf, through the exercise or nonexercise of an electionor option, you provide an annuity for your beneficiary

at 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.

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Table 2.

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

Enter the present value of your annuity contract2.


Tax-free amount. 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 amount (net cost in the plan). Subtract line 4 from line 1. Include this amountin the total on line 16b of Form 1040 or line 12b of Form 1040A. Also, enter this amounton 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.

31,00 0

155 ,0 0 0

.20

6,200

24,800

$

$

Filled-In Table 2 for David Brown Example

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. See

Thrift 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 that will show how muchof your total annuity received in the past year was fromeach 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 a traditional IRAor another qualified retirement plan. If you do not haveOPM transfer the interest to an IRA or other plan in adirect rollover, tax will be withheld at a 20% rate. SeeRollover Rules, later. The interest does notqualify asa lump-sum distribution eligible for capital gain treat-ment or the 10-year tax option. It may also be subjectto an additional 10% tax on early distributions if youseparate from service before the calendar year in whichyou reach age 55. For more information, see Lump-Sum Distributions and Tax on Early Distributions inPublication 575.

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

working. 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, when

absent, 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 are later reem-

ployed by the federal government, you can continue toreceive your annuity during reemployment. The em-ploying agency will pay you the difference between yoursalary for your period of reemployment and your annu-ity. This amount is taxable as wages. Your annuity willcontinue to be taxed just as it was before. If you arestill recovering your cost, you continue to do so. If youhave recovered your cost, the annuity you receive whileyou are reemployed is generally fully taxable.

Nonresident AliensThe following special rules apply to nonresident alienfederal employees performing services outside the

United States and to 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 wouldnot 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-

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Table 1.


10.

1.



3.


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.





9.

Add lines 6 and 8



$

$

$








300260240170120

360310260210160



410360310260210

12,00 0 .00

24,800.00

36 0

68.89

688.90

-0 -

24,800.00

688.90

11,3 11.10

688.90

24,111.10

$

Filled-In Table 1 for David Brown Example

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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 CSRS

or FERS annuity or your TSP distributions, use the fol-lowing worksheet. (For an annuity, first complete Table1 in this publication.)

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 UnitedStates

Enter the total U.S. Government basicpay for all services

Divide 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 per-formed all services for the U.S. Government abroad asa nonresident alien. You retired and began to receivea monthly annuity of $200. Your total basic pay for allservices for the U.S.Government was $100,000.

The taxable amount of your annuity figured usingTable 1 in this publication is $720. Because you are a

nonresident alien, you figure the limited taxable amountof your annuity as follows.



Enter the total U.S. Government basicpay other than tax-exempt pay forservices performed outside the UnitedStates



1.

2.

3.

4.


5.

$ 720

0

100 ,0 0 0

0

0

Example 2. You are a nonresident alien who per-formed services for the U.S. Government as a nonres-ident alien both within the United States and abroad.You retired and began to receive a monthly annuity of$240.

Your total basic pay for your services for the U.S.Government was $120,000; $80,000 was for work donein the United States, and $40,000 was for your workdone in a foreign country.

The taxable amount of your annuity figured usingTable 1 in this publication is $1,980. Because you area nonresident alien, you figure the limited taxableamount of your annuity as follows.



Enter the total U.S. Government basic

pay other than tax-exempt pay forservices performed outside the UnitedStates



1.

2.

3.

4.


5.

$ 1,98 0

40,000

120 ,00 0

.333

6 59$

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 atraditional IRA or other qualified retirement plan, the taxon that part is deferred until you receive payments fromthe traditional IRA or other plan. See Rollover Rules,later.

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TSP annuity. If you ask the TSP to buy an annuity withthe money in your account, the annuity payments aretaxed when you receive them. The payments are notsubject to the additional 10% tax on early distributions,even if you 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 within 60 daysinto a traditional IRA or other qualified plan. (See

Rollover Rules, later.) If you receive your entire TSPaccount balance in a single tax year, you may be ableto use the 10-year tax option to figure your tax. SeeLump-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 Taxin Part I.

Tax on early distributions. Any money paid to youfrom your TSP account before you reach age 591/2 maybe subject to an additional 10% tax on early distribu-tions. However, this additional tax does not apply in anyof the following situations.

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

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

3) You retire on disability.

For more information, see Tax on Early Distributionsin Publication 575.

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 a traditional IRA or otherqualified plan equal to the declared distribution amount.See Rollover Rules, next. If you withdraw any money

from your TSP account the same year, the TSP mustwithhold 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 traditional IRAand its reinvestment in another qualified retirement planor traditional IRA. Do not include the amount rolled over

in your income, and you cannot take a deduction for it.The amount rolled over is taxed later as the new pro-gram pays that amount to you. If you roll over amountsinto a traditional IRA, later distributions of theseamounts from the traditional IRA do not qualify for thecapital gain or the 10-year tax option. Capital gaintreatment or the 10-year tax option will be restored if thetraditional IRA contains only amounts rolled over froma qualified plan and these amounts are rolled over fromthe traditional IRA into a qualified retirement 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,

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

4) A hardship distribution.

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 a traditional IRA.The distribution cannot be rolled over into an educationIRA or a Roth 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.

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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 tra-ditional IRA. However, the full amount is treated asdistributed to you even though you actually receive only80%. You must include in income any part (includingthe part withheld) that you do not roll over within 60days to another qualified retirement plan or to a tradi-tional 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 the10-year tax option. See Lump-Sum Distributions inPublication 575. If you roll over any part of the distri-bution, the part you keep does notqualify for this spe-

cial tax treatment.Rolling over more than amount received. If you

want 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, 2001, 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, 2001.

If you roll over only $8,000, you must include in yourgross 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 the 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 in

the 60-day period allowed for a tax-free rollover to aqualified plan or a traditional IRA. Also, the 60-day pe-riod does not end earlier than 10 days after the depositis no longer a frozen deposit. To qualify under this rule,the deposit must be frozen on at least one day duringthe 60-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 a traditional IRA. You cannotroll it over into a qualified retirement plan. A distributionpaid to a beneficiary other than the employee's surviv-ing spouse is 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 the

amount rolled over, regardless of how the rollover wasmade, on line 16b. If you file Form 1040A, report thetotal distributions on line 12a and the taxable amountminus the amount rolled over on line 12b.

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 atraditional IRA,

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

3) The nontaxability of any part of the distribution thatyou roll over to another qualified retirement plan orto a traditional IRA within 60 days after you receivethe distribution, 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 theTSP or OPM make a distribution less than 30 days afterthe explanation is provided, as long as the following tworequirements are 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.

Direct Rollover

No withholding.

No 10% additional tax.

Not income until later distributedto you from the other plan or thetraditional IRA.

Payer generally must withholdincome tax of 20% on the taxablepart even if you roll it over.

Payment to you

If you are under age 5912, a 10%additional tax may apply to thetaxable part, including the taxwithheld, that you do not roll over.

Taxable part, including the taxwithheld, is income to the extent notrolled over.

If rolled over to another qualifiedplan, may be eligible for capitalgain treatment or the 10-year taxoption when later distributed toyou from that plan.

May be eligible for capital gaintreatment or the 10-year tax option ifno part is rolled over.

Comparison Chart

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 12a. 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 12b (Form 1040A). If you useForm 4972, Tax on Lump-Sum Distributions, however,to report the tax on any amount, do not include that

amount on lines 16a and 16b or lines 12a and 12b;follow the Form 4972 instructions.

If you received only fully taxable payments from yourretirement, the TSP, or other pension plan, report onForm 1040, line 16b, or Form 1040A, line 12b, the totalreceived for the year (except for any amount reportedon Form 4972); no entry is required on line 16a (Form1040) or line 12a (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 AnnuityIf you retired on disability, the disability annuity you re-ceive from the CSRS or FERS is taxable as wages untilyou reach minimum retirement age. Beginning on theday after you reach minimum retirement age, yourpayments are treated as a retirement annuity. At thattime or at any time thereafter, you can begin to recoverthe cost of your annuity under the rules discussed inPart 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 cannot

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be older than age 62. Specifically, your MRA with atleast 10 years of service is shown in the following table.

If you were born in

1947 or earlier

1948

1949

1950

1951

55 years

Your MRA is

1952

55 years, 2 months

55 years, 4 months

55 years, 6 months

56 years

55 years, 8 months

55 years, 10 months

1953 to 1964

1965

1966

1967

1968

1969

1970 or later

56 years, 2 months

56 years, 4 months

56 years, 6 months

57 years

56 years, 8 months

56 years, 10 months

How to report. You must report all your disability an-nuity payments received before minimum retirementage on line 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.

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 andcontinuation of pay for up to 45 days, are taxable.

Sick pay or disability payments repaid. If yourepay sick leave or disability annuity payments you re-ceived in an earlier year to be eligible for nontaxableFECA benefits, you can deduct the amount you repay.You can claim the deduction whether you repay theamount yourself or have the FECA payment sent di-

rectly to your employing agency or the OPM.Claim the deduction on Schedule A (Form 1040) as

a miscellaneous itemized deduction, subject to the2%-of-adjusted-gross-income limit. It is considered abusiness loss and may create a net operating loss ifyour 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 annuity paymentsin the same year you receive them, the repayment re-

duces the taxable sick pay or disability annuity you in-clude in income. 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 receivea CSRS or FERS disability annuity for disability arisingfrom the same injuries, you cannot treat the disabilityannuity payments as tax-exempt income. They aresubject to the rules described earlier under DisabilityAnnuity.

Payment for unused annual leave. When you retire,any payment for your unused annual leave is taxed aswages in the tax year you receive the payment.

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 retired on permanent and totaldisability, and you

a) Received taxable disability income, and

b) Did not reach mandatory retirement age(ex-plained later) before the tax year.

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 but

you 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 of

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time while working for pay or profit, or in work generallydone for pay or profit.

Mandatory retirement age. This is the age set by youremployer at which you would have had to retire if youhad not become disabled. There is no mandatory re-tirement age for most federal employees. However,there is a mandatory retirement age for the followingemployees.

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 of

the 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 figure the credit yourself,fill out the front of either Schedule R (if you are filingForm 1040) or Schedule 3 (if you are filing Form1040A). Next fill out Part III of either Schedule R orSchedule 3.

If you want the Internal Revenue Service to figureyour tax and credits, including the credit for the elderlyor the disabled, see Publication 967, The IRS Will Fig-ure Your Tax, and the instructions for Schedule R (Form1040) or Schedule 3 (Form 1040A).

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

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 to

the survivor or beneficiary. This treatment also appliesto payments for accrued annual leave.

Dependents of public safety officers. The PublicSafety Officer's Benefits program, administered throughthe Bureau of Justice Assistance, provides a tax-freedeath benefit to eligible survivors of public safety offi-cers whose death is the direct and proximate result ofa traumatic injury sustained in the line of duty.The deathbenefit is not includible in the decedent's gross estate

for federal estate tax purposes, or the survivor's grossincome for federal income tax purposes.

A public safety officer is a law enforcement officer,firefighter, or member of a public rescue squad or am-bulance crew.

This program may pay survivors a temporary benefitup to $3,000 if it finds that the death of the public safetyofficer is one for which a final benefit will probably bepaid. If there is no final payment, the recipient of thetemporary benefit is liable for repayment. However, theBureau may not require all or part of the repayment ifit will cause a hardship. If that happens, that amount istax free.

For more information on this program, you maycontact the Bureau of Justice Assistance bycalling 1-888-744-6513, or 202-307-0635 if you

are in the metropolitan Washington, D.C., calling area.

Additional information about this death benefitis also available on the Internet atwww.ojp.usdoj.gov/BJA. Select Funding

then select Benefits.

FERS Death BenefitYou may be entitled to a special FERS death benefit ifyou were the spouse of an active FERS employee who

died 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.

2) If a FERS survivor annuity is paid, all of the specialdeath benefit is taxable. You cannot allocate anyof the employee's FERS contributions 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 divided by36.

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2) If a FERS survivor annuity is paid, allocate theemployee's FERS contributions between the 3-yearannuity and the survivor annuity. Make the allo-cation in the same proportion that the expected re-turn from each annuity bears to the total expectedreturn from both annuities. Divide the amount allo-cated to the 3-year annuity by 36. The result is thetax-free part of each monthly payment of the 3-yearannuity.

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.

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 mustuse 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 part that is the amount of each payment thatis more than the part that represents your cost. Thetax-free part remains the same, even if your annuity isincreased. However, see Exclusion limit, later.

Surviving spouse with no children receiving annui-ties. Under the Simplified Method, you figure the tax-free part of each full monthly annuity payment by di-viding the employee's cost by a number of months

based on your age. This number will differ dependingon whether your annuity starting date is on or beforeNovember 18, 1996, or later. To use the SimplifiedMethod, complete the worksheet in Table 1, near theend of this publication. Specific instructions for Table 1are given in Part II under Simplified Method.

Example. Diane Greene, age 48, began receivinga $1,500 monthly CSRS annuity in March 2000 uponthe death of her husband. Her husband was a federalemployee when he died. She received 10 payments in2000. 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 ofher worksheet). If she lives to collect more than 360payments, the payments after the 360th will be fullytaxable. If she dies before 360 payments have beenmade, a miscellaneous itemized deduction (not subjectto the 2%-of-adjusted-gross-income limit) will be al-

lowed for the unrecovered cost on her final income taxreturn.

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 ben-eficiaries. If only the surviving spouse is left drawing

an annuity, the surviving spouse is entitled to the entiremonthly exclusion as figured in the worksheet.

Example. The facts are the same as in the examplefor Diane Greene in the preceding discussion exceptthat the Greenes had a son, Robert, who was age 15at the time of his father's death. Robert is entitled to a$500 per month temporary annuity until he reaches age18 (age 22, if he remains a full-time student and doesnot marry).

In completing the Table 1 worksheet (not shown),Diane fills out the entries through line 4 exactly asshown in the filled-in Table 1 worksheet for the earlierexample. That is, she includes on line 1 only the

amount of the annuity she herself received and sheuses on line 3 the 360 factor for her age. After arrivingat the $100 monthly exclusion on line 4, however, Dianeallocates it between her own annuity and that of herson.

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 andRobert's $500 annuities). She enters the result, $75,

just below the entry space for line 4. She completesthe worksheet by entering $750 on lines 5 and 8 and$14,250 on line 9.

A second worksheet (not shown) is completed for

Robert's annuity. On line 1, he enters $5,000 as thetotal annuity received. Lines 2, 3, and 4 are the sameas those on his mother's worksheet. In allocating the$100 monthly exclusion on line 4 to his annuity, Robertmultiplies it by the fraction $500 over $2,000. His re-sulting monthly exclusion is $25. His exclusion for theyear (line 8) is $250 and his taxable annuity for the year(line 9) is $4,750.

Diane and Robert 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 filled-in Table 1 worksheet for the earlierexample.

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Table 1.


10.

1.



3.


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.





9.

Add lines 6 and 8



$

$

$








300260240170120

360310260210160



410360310260210

15,0 00

36,000

36 0

100

1,000

0

36,000

1,000

14,000

1,000

35,000

$

Filled-In Table 1 for Diane Greene Example

Page 18


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When Robert's temporary annuity ends, the compu-tation of the total monthly exclusion will not change. Theonly difference will be that Diane will then claim the fullexclusion against her annuity alone.

Surviving child only. A method similar to the Simpli-fied Method also can be used to figure the taxable andnontaxable parts of a temporary annuity for a survivingchild when there is no surviving spouse annuity. To use

this method, divide the deceased employee's cost bythe number of months from the child's annuity startingdate until the date the child will reach age 22. The resultis the monthly exclusion. (But the monthly exclusioncannot be more than the monthly annuity payment. Youcan carry over unused exclusion amounts to applyagainst future 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 youngestchildwill reach age 22. This monthly exclusion must then beallocated among the children in proportion to theirmonthly annuity payments, like the exclusion shown in

the previous example.Disabled child. If a child otherwise entitled to a

temporary 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, your entire annuity is taxable. If yourannuity starting date is before 1987, the tax-free partof each whole monthly payment remains the same eachyear you receive paymentseven if you outlive thenumber of months used on line 3 of the SimplifiedMethod Worksheet. The total exclusion may be morethan the cost of the annuity.

Deduction of unrecovered cost. If the annuity startingdate is after July 1, 1986, and the annuitant's deathoccurs before all the cost is recovered tax free, theunrecovered cost can be claimed as a miscellaneousitemized deduction (not subject to the limit on 2% ofadjusted gross income) for the annuitant's last tax year.

Survivors of Slain Public Safety Off

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