| Pub. 721, Tax Guide to U.S. Civil Service Retirement Benefits |
2005 Tax Year |
Publication 721 - Main Contents
Part I General Information
This part of the publication contains information that can apply to most recipients of civil service retirement benefits.
If you leave federal government service or transfer to a job not under the CSRS or FERS and you are not eligible for an immediate
annuity, you can
choose to receive a refund of the money in your CSRS or FERS retirement account. The refund will include both regular and
voluntary contributions you
made to the fund, plus any interest payable.
If the refund includes only your contributions, none of the refund is taxable. If it includes any interest, the interest is
taxable unless you roll
it over into another qualified plan or a traditional individual retirement arrangement (IRA). If you do not have the Office
of Personnel Management
(OPM) transfer the interest to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. See Rollover Rules in Part II
for information on how to make a rollover.
Interest is not paid on contributions to the CSRS for service after 1956 unless your service was for more than 1 year but
not more than 5 years.
Therefore, many employees who withdraw their contributions under the CSRS do not get interest and do not owe any tax on their
refund.
If you do not roll over interest included in your refund, it may qualify as a lump-sum distribution eligible for capital gain
treatment or the
10-year tax option. If you separate from service before the calendar year in which you reach age 55, it may be subject to
an additional 10% tax on
early distributions. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.
A lump-sum distribution is eligible for capital gain treatment or the 10-year tax option only if the plan participant was
born before January 2,
1936.
Tax Withholding and Estimated Tax
The CSRS or FERS annuity you receive is subject to federal income tax withholding, unless you choose not to have tax withheld.
OPM will tell you
how to make the choice. The choice for no withholding remains in effect until you change it. These withholding rules also
apply to a disability
annuity, whether received before or after minimum retirement age.
If you choose not to have tax withheld, or if you do not have enough tax withheld, you may have to make estimated tax payments.
You may owe a penalty if the total of your withheld tax and estimated tax does not cover most of the tax shown on your return.
Generally, you will
owe the penalty if the additional tax you must pay with your return is $1,000 or more and more than 10% of the tax shown on
your return. For more
information, including exceptions to the penalty, see chapter 4 of Publication 505, Tax Withholding and Estimated Tax.
Form CSA 1099R.
Form CSA 1099R is mailed to you by OPM each year. It will show any tax you had withheld. File a copy of Form CSA 1099R
with your tax return if any
federal income tax was withheld.
Choosing no withholding on payments outside the United States.
The choice for no withholding generally cannot be made for annuity payments to be delivered outside the United States
and its possessions.
To choose no withholding if you are a U.S. citizen or resident, you must provide OPM with your home address in the
United States or its
possessions. Otherwise, OPM has to withhold tax. For example, OPM must withhold if you provide a U.S. address for a nominee,
trustee, or agent (such
as a bank) to whom the benefits are to be delivered, but you do not provide your own U.S. home address.
If you certify to OPM that you are not a U.S. citizen, a U.S. resident alien, or someone who left the United States
to avoid tax, 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 Aliens.
Withholding certificate.
If you give OPM a Form W-4P-A, Election of Federal Income Tax Withholding, you can choose not to have tax withheld
or you can choose to have tax
withheld depending on your marital status and withholding allowances. If you do not make either of these choices, OPM must
withhold as if you were
married with three withholding allowances.
To change the amount of tax withholding or to stop withholding, call OPM's Retirement Information Office at 1-888-767-6738
(customers within the
local Washington, D.C. calling area must call 202-606-0500), or call Annuitant Express at 1-800-409-6528. No special form
is needed. You will need
your retirement claim number (CSA or CSF), your social security number, and your personal identification number (PIN) when
you call. If you have
TTY/TDD equipment, call 1-800-878-5707. If you need a PIN, call OPM's Retirement Information Office.
You also can change the amount of withholding or stop withholding through the Internet at
www.servicesonline.opm.gov. You will need your retirement claim
number (CSA or CSF) and your PIN.
Withholding from certain lump-sum payments.
If you leave the federal government before becoming eligible to retire and you apply for a refund of your CSRS or
FERS contributions, or you die
without leaving a survivor eligible for an annuity, you or your beneficiary will receive a distribution of your contributions
to the retirement plan
plus any interest payable. Tax will be withheld at a 20% rate on the interest distributed. However, tax will not be withheld
if you have OPM transfer
(roll over) the interest directly to your traditional IRA or other qualified plan. See Rollover Rules in Part II. If you receive only your
contributions, no tax will be withheld.
Withholding from Thrift Savings Plan payments.
Generally, a distribution that you receive from the TSP is subject to federal income tax withholding. The amount withheld
is:
-
20% if the distribution is an eligible rollover distribution, or
-
10% if it is a nonperiodic distribution other than an eligible rollover distribution, or
-
An amount determined by treating the payment as wages, if it is a periodic distribution.
However, you usually can choose not to have tax withheld from TSP payments other than eligible rollover distributions. By
January 31 after the end
of the year in which you receive a distribution, the TSP will issue Form 1099-R showing the total distributions you received
in the prior year and the
amount of tax withheld.
For a detailed discussion of withholding on distributions from the TSP, see Important Tax Information About Payments
From Your TSP Account,
available from your agency personnel office or from the TSP.
The above document is also available on the Internet at
www.tsp.gov. Select “Forms & Publications,” then select “Publications,” then “Tax
Notices.”
Estimated tax.
Generally, you should make estimated tax payments for 2006 if you expect to owe at least $1,000 in tax (after subtracting
your withholding and
credits) and you expect your withholding and your credits to be less than the smaller of:
-
90% of the tax to be shown on your income tax return for 2006, or
-
The tax shown on your 2005 income tax return (110% of that amount if the adjusted gross income shown on the return was more
than $150,000
($75,000 if your filing status for 2006 will be married filing separately)). The return must cover all 12 months.
You do not have to pay estimated tax for 2006 if you were a U.S. citizen or resident for all of 2005 and you had no
tax liability for the full
12-month 2005 tax year.
Form 1040-ES contains a worksheet that you can use to see if you should make estimated tax payments. For more information,
see chapter 2 in
Publication 505.
If your gross income, including the taxable part of your annuity, is less than a certain amount, you generally do not have
to file a federal income
tax return for that year. The gross income filing requirements for the tax year are in the instructions to the Form 1040,
1040A, or 1040EZ.
Children.
If you are the surviving spouse of a federal employee or retiree and your monthly annuity check includes 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, treat his or her annuity as unearned income to apply the filing requirements.
Form CSF 1099R.
Form CSF 1099R will be mailed to you by January 31 after the end of each tax year. It will show the total amount of
the annuity you received in the
past year. It also should show, separately, the survivor annuity for a child or children. Only the part that is each individual's
survivor annuity
should be shown on that individual's Form 1040 or 1040A.
If your Form CSF 1099R does not show separately the amount paid to you for a child or children, attach a statement
to your return, along with a
copy of Form CSF 1099R, explaining why the amount shown on the tax return differs from the amount shown on Form CSF 1099R.
You may request a Summary of Payments, showing the amounts paid to you for your child(ren), from OPM by calling OPM's Retirement
Information Office
at 1-888-767-6738 (customers within the local Washington, D.C. calling area must call 202-606-0500). You will need your CSF
claim number and your
social security number when you call.
Taxable part of annuity.
To find the taxable part of each annuity, see the discussion in Part IV, Rules for Survivors of Federal Employees, or Part V, Rules
for Survivors of Federal Retirees, whichever applies.
Part II Rules for Retirees
This part of the publication is for retirees who retired on nondisability retirement. If you retired on disability, see Part
III, Rules for
Disability Retirement and Credit for the Elderly or the Disabled, later.
Annuity statement.
The statement you received from OPM when your CSRS or FERS annuity was approved shows the commencing date (the annuity
starting date), the gross
monthly rate of your annuity benefit, and your total contributions to the retirement plan (your cost). You will use this information
to figure the
tax-free recovery of your cost.
Annuity starting date.
If you retire from federal government service on a regular annuity, your annuity starting date is the commencing date
on your annuity statement
from OPM. If something delays payment of your annuity, such as a late application for retirement, it does not affect the date
your annuity begins to
accrue or your annuity starting date.
Gross monthly rate.
This is the amount you were to get after any adjustment for electing a survivor's annuity or for electing the lump-sum
payment under the
alternative annuity option (if either applied) but before any deduction for income tax withholding, insurance premiums, etc.
Your cost.
Your monthly annuity payment contains an amount on which you have previously paid income tax. This amount represents
part of your contributions to
the retirement plan. Even though you did not receive the money that was contributed to the plan, it was included in your gross
income for federal
income tax purposes in the years it was taken out of your pay.
The cost of your annuity is the total of your contributions to the retirement plan, as shown on your annuity statement
from OPM. If you elected the
alternative annuity option, it includes any deemed deposits and any deemed redeposits that were added to your lump-sum credit.
(See Lump-sum
credit under Alternative Annuity Option, later.)
If you repaid contributions that you had withdrawn from the retirement plan earlier, or if you paid into the plan
to receive full credit for
service not subject to retirement deductions, the entire repayment, including any interest, is a part of your cost. You cannot
claim an interest
deduction for any interest payments. You cannot treat these payments as voluntary contributions; they are considered regular
employee contributions.
Recovering your cost tax free.
How you figure the tax-free recovery of the cost of your CSRS or FERS annuity 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 have chosen to use either the
General Rule or
the Simplified Method (discussed later).
-
If your annuity starting date is after November 18, 1996, you must use the Simplified Method.
Under both the General Rule and the Simplified Method, each of your monthly annuity payments is made up of two parts:
the tax-free part that is a
return of your cost, and the taxable part that is the amount of each payment that is more than the part that represents your
cost. The tax-free part
is a fixed dollar amount. It remains the same, even if your annuity is increased. Generally, this rule applies as long as
you receive your annuity.
However, see Exclusion limit, later.
Choosing a survivor annuity after retirement.
If you retired without a survivor annuity and report your annuity under the Simplified Method, do not change your
tax-free monthly amount even if
you later choose a survivor annuity.
If you retired without a survivor annuity and report your annuity under the General Rule, you must figure a new exclusion
percentage if you later
choose a survivor annuity. To figure it, reduce your cost by the amount you previously recovered tax free. Figure the expected
return as of the date
the reduced annuity begins. For details on the General Rule, see Publication 939.
Canceling a survivor annuity after retirement.
If you notify OPM that your marriage has ended, your annuity might be increased to remove the reduction for a survivor
benefit. The increased
annuity does not change the cost recovery you figured at the annuity starting date. The tax-free part of each annuity payment
remains the same.
For more information about choosing or canceling a survivor annuity after retirement, contact OPM's Retirement Information
Office at 1-888-767-6738
(customers within the local Washington, D.C. calling area must call 202-606-0500).
Exclusion limit.
If your annuity starting date is after 1986, the total amount of annuity income that you (or the survivor annuitant)
can exclude over the years as
a return of your cost may not exceed your total cost. Annuity payments you or your survivors receive after the total cost
in the plan has been
recovered are fully taxable.
Example.
Your annuity starting date is after 1986 and you exclude $100 a month under the Simplified Method. If your cost is $12,000,
the exclusion ends
after 10 years (120 months). Thereafter, your entire annuity is taxable.
Annuity starting date before 1987.
If your annuity starting date is before 1987, you continue to take your monthly exclusion figured under the General
Rule or Simplified Method for
as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor continues to take that same
exclusion. The total
exclusion may be more than your cost.
Deduction of unrecovered cost.
If your annuity starting date is after July 1, 1986, and the cost of your annuity has not been fully recovered at
your (or the survivor
annuitant's) death, a deduction is allowed for the unrecovered cost. The deduction is claimed on your (or your survivor's)
final tax return as a
miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income limit). If your annuity starting date is
before July 2, 1986, no tax
benefit is allowed for any unrecovered cost at death.
If 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 has figured the taxable amount of your annuity shown on your Form CSA 1099R using the Simplified Method.) You
could have chosen to use
either the Simplified Method or the General Rule if your annuity starting date is after July 1, 1986, but before November
19, 1996. The Simplified
Method does not apply if your annuity starting date is before July 2, 1986.
Under the Simplified Method, you figure the tax-free part of each full monthly payment by dividing your cost by a number of
months based on your
age. This number will differ depending on whether your annuity starting date is on or before November 18, 1996, or later.
If your annuity starting
date is after 1997 and your annuity includes a survivor benefit for your spouse, this number is based on your combined ages.
Worksheet A.
Use Worksheet A, Simplified Method (near the end of this publication), to figure your taxable annuity. Be sure to
keep the completed worksheet. It
will help you figure your taxable amounts for later years.
Instead of Worksheet A, you generally can use the Simplified Method Worksheet in the instructions for Form 1040 or Form 1040A
to figure your
taxable annuity. However, you must use Worksheet A and Worksheet B in this publication if you chose the alternative annuity
option, discussed later.
Line 2.
See Your cost, earlier, for an explanation of your cost in the plan. If your annuity starting date is after November 18, 1996, and you
chose the alternative annuity option (explained later), you must reduce your cost by the tax-free part of the lump-sum payment
you received.
Line 3.
Find the appropriate number from one of the tables at the bottom of the worksheet. If your annuity starting date is
after 1997, use:
-
Table 1 for an annuity without a survivor benefit, or
-
Table 2 for an annuity with a survivor benefit.
If your annuity starting date is before 1998, use Table 1.
Line 6.
If you retired before 2005, the amount previously recovered tax free that you must enter on line 6 is the total amount
from line 10 of last year's
worksheet. If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, it includes
the tax-free part of
the lump-sum payment you received.
Example.
Bill Smith retired from the Federal Government on March 31, 2005, under an annuity that will provide a survivor benefit for
his wife, Kathy. His
annuity starting date is April 1, 2005. He must use the Simplified Method to figure the tax-free part of his annuity benefits.
Bill's monthly annuity benefit is $1,000. He had contributed $31,000 to his retirement plan and had received no distributions
before his annuity
starting date. At his annuity starting date, he was 65 and Kathy was 57.
Bill's completed Worksheet A is shown on the next page. To complete line 3, he used Table 2 at the bottom of the worksheet
and found the number in
the second column opposite the age range that includes 122 (his and Kathy's combined ages). Bill keeps a copy of the completed
worksheet for his
records. It will help him (and Kathy, if she survives him) figure the taxable amount of the annuity in later years.
Bill's tax-free monthly amount is $100. (See line 4 of the worksheet.) If he lives to collect more than 310 monthly payments,
he will have to
include in his gross income the full amount of any annuity payments received after 310 payments have been made.
If Bill does not live to collect 310 monthly payments and his wife begins to receive monthly payments, she also will exclude
$100 from each monthly
payment until 310 payments (Bill's and hers) have been collected. If she dies before 310 payments have been made, a miscellaneous
itemized deduction
(not subject to the 2%-of-adjusted- gross-income limit) will be allowed for the unrecovered cost on her final income tax return.
If your annuity starting date is after November 18, 1996, you cannot use the General Rule to figure the tax-free part of your
CSRS or FERS annuity.
If your annuity starting date is after July 1, 1986, but before November 19, 1996, you could have chosen to use either the
General Rule or the
Simplified Method. If your annuity starting date is before July 2, 1986, you could have chosen to use the General Rule only
if you could not use the
Three-Year Rule.
Under the General Rule, you figure the tax-free part of each full monthly payment by multiplying the initial gross monthly
rate of your annuity by
an exclusion percentage. Figuring this percentage is complex and requires the use of actuarial tables. For these tables and
other information about
using the General Rule, see Publication 939.
If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the Three-Year Rule.
Under this rule, you
excluded all the annuity payments from income until you fully recovered your cost. After your cost was recovered, all payments
became fully taxable.
You cannot use another rule to again exclude amounts from income.
The Three-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986.
Worksheet A. Simplified Method for Bill Smith Keep for Your Records See the instructions in Part II of this publication under Simplified Method.
| 1. |
Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040,
line 16a, or Form 1040A, line 12a
|
1. |
$ 8,000
|
| 2. |
Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion
* |
2. |
31,000
|
|
Note: If your annuity starting date was before this year and you completed this
worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go
to line 3. |
|
|
| 3. |
Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after
1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1
|
3. |
310
|
| 4. |
Divide line 2 by line 3
|
4. |
100
|
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting
date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6
|
5. |
800
|
| 6. |
Enter any amounts previously recovered tax free in years after 1986
|
6. |
0
|
| 7. |
Subtract line 6 from line 2
|
7. |
31,000
|
| 8. |
Enter the smaller of line 5 or line 7
|
8. |
800
|
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero.
Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1099R
shows a larger amount,
use the amount on this line instead
|
9. |
$7,200
|
| 10. |
Add lines 6 and 8
|
10. |
800
|
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2
|
11. |
$30,200
|
Table 1 for Line 3 Above
|
| |
IF the age at
annuity starting date was |
|
AND your
annuity starting date was— |
| |
|
before November 19, 1996,
enter on line 3
|
after November 18, 1996,
enter on line 3
|
| |
55 or under
|
300
|
360
|
| |
56-60
|
260
|
310
|
| |
61-65
|
240
|
260
|
| |
66-70
|
170
|
210
|
| |
71 or over
|
120
|
160
|
Table 2 for Line 3 Above
|
| |
IF the combined ages at annuity starting date were |
|
THEN enter on line 3 |
|
|
|
| |
110 or under
|
|
410
|
|
|
|
| |
111-120
|
|
360
|
|
|
|
| |
121-130
|
|
310
|
|
|
|
| |
131-140
|
|
260
|
|
|
|
| |
141 or over
|
|
210
|
|
|
|
|
*A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August
21,
1996.
|
Worksheet A. Simplified Method for Bill Smith Keep for Your Records See the instructions in Part II of this publication under Simplified Method.
| 1. |
Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040,
line 16a, or Form 1040A, line 12a
|
1. |
$ 8,000
|
| 2. |
Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion
* |
2. |
31,000
|
|
Note: If your annuity starting date was before this year and you completed this
worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go
to line 3. |
|
|
| 3. |
Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after
1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1
|
3. |
310
|
| 4. |
Divide line 2 by line 3
|
4. |
100
|
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting
date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6
|
5. |
800
|
| 6. |
Enter any amounts previously recovered tax free in years after 1986
|
6. |
0
|
| 7. |
Subtract line 6 from line 2
|
7. |
31,000
|
| 8. |
Enter the smaller of line 5 or line 7
|
8. |
800
|
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero.
Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1099R
shows a larger amount,
use the amount on this line instead
|
9. |
$7,200
|
| 10. |
Add lines 6 and 8
|
10. |
800
|
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2
|
11. |
$30,200
|
Table 1 for Line 3 Above
|
| |
IF the age at
annuity starting date was |
|
AND your
annuity starting date was— |
| |
|
before November 19, 1996,
enter on line 3
|
after November 18, 1996,
enter on line 3
|
| |
55 or under
|
300
|
360
|
| |
56-60
|
260
|
310
|
| |
61-65
|
240
|
260
|
| |
66-70
|
170
|
210
|
| |
71 or over
|
120
|
160
|
Table 2 for Line 3 Above
|
| |
IF the combined ages at annuity starting date were |
|
THEN enter on line 3 |
|
|
|
| |
110 or under
|
|
410
|
|
|
|
| |
111-120
|
|
360
|
|
|
|
| |
121-130
|
|
310
|
|
|
|
| |
131-140
|
|
260
|
|
|
|
| |
141 or over
|
|
210
|
|
|
|
|
*A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August
21,
1996.
|
Alternative Annuity Option
If you are eligible, you may choose an alternative form of annuity. If you make this choice, you will receive a lump-sum payment
equal to your
contributions to the plan and a reduced monthly annuity. You are eligible to make this choice if you meet all of the following
requirements.
-
You are retiring, but not on disability.
-
You have a life-threatening illness or other critical medical condition.
-
You do not have a former spouse entitled to court ordered benefits based on your service.
If you are not eligible or do not choose this alternative annuity, you can skip the following discussion and go to Federal Gift Tax,
later.
The lump-sum payment you receive under the alternative annuity option generally has a tax-free part and a taxable part. The
tax-free part
represents part of your cost. The taxable part represents part of the earnings on your annuity contract. If your lump-sum
credit (discussed later)
includes a deemed deposit or redeposit, the taxable amount may be more than the lump-sum payment.
You must include the taxable part of the lump-sum payment in your income for the year you receive the payment unless you roll
it over into another
qualified plan or a traditional IRA. If you do not have OPM transfer the taxable amount to an IRA or other plan in a direct
rollover, tax will be
withheld at a 20% rate. See Rollover Rules, later, for information on how to make a rollover.
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 add funds from another source.
The taxable part of the lump-sum payment does not qualify as a lump-sum distribution eligible for capital gain treatment or
the 10-year tax option.
It also may be subject to an additional 10% tax on early distributions if you separate from service before the calendar year
in which you reach age
55. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.
Worksheet B.
Use Worksheet B, Lump-Sum Payment (near the end of this publication), to figure the taxable part of your lump-sum
payment. Be sure to keep the
completed worksheet for your records.
To complete the worksheet, you will need to know the amount of your lump-sum credit and the present value of your
annuity contract.
Lump-sum credit.
Generally, this is the same amount as the lump-sum payment you receive (the total of your contributions to the retirement
system). However, for
purposes of the alternative annuity option, your lump-sum credit also may include deemed deposits and redeposits that OPM
advanced to your retirement
account so that you are given credit for the service they represent. Deemed deposits (including interest) are for federal
employment during which no
retirement contributions were taken out of your pay. Deemed redeposits (including interest) are for any refunds of retirement
contributions that you
received and did not repay. You are treated as if you had received a lump-sum payment equal to the amount of your lump-sum
credit and then had made a
repayment to OPM of the advanced amounts.
Present value of your annuity contract.
The present value of your annuity contract is figured using actuarial tables provided by the IRS.
If you are receiving a lump-sum payment under the Alternative Annuity Option, you can write to the address below to find out
the present value of
your annuity contract.
Internal Revenue Service
Actuarial Group 2 SE:T:EP:RA:T:A2
1111 Constitution Ave., NW PE-4G6
Washington, DC 20224
Example.
David Brown retired from the federal government in 2005, one month after his 55th birthday. He had contributed $31,000 to
his retirement plan and
chose to receive a lump-sum payment of that amount under the alternative annuity option. The present value of his annuity
contract was $155,000.
The tax-free part and the taxable part of the lump-sum payment are figured using Worksheet B, as shown below. The taxable
part ($24,800) is also
his net cost in the plan, which is used to figure the taxable part of his reduced annuity payments. See Reduced Annuity, later.
Worksheet B. Lump-Sum Payment for David Brown Keep for Your Records See the instructions in Part II of this publication under Alternative Annuity Option.
1. |
Enter your lump-sum credit (your cost in the plan at the annuity starting date)
|
1. |
$ 31,000
|
| 2. |
Enter the present value of your annuity contract
|
2. |
155,000
|
| 3. |
Divide line 1 by line 2
|
3. |
.20
|
| 4. |
Tax-free amount. Multiply line 1 by line 3. (Caution: Do not include this amount on line 6 of Worksheet
A in this publication.)
|
4. |
$6,200
|
| 5. |
Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on line
16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet A in this publication.
|
5. |
$24,800
|
| |
Worksheet B. Lump-Sum Payment for David Brown Keep for Your Records See the instructions in Part II of this publication under Alternative Annuity Option.
1. |
Enter your lump-sum credit (your cost in the plan at the annuity starting date)
|
1. |
$ 31,000
|
| 2. |
Enter the present value of your annuity contract
|
2. |
155,000
|
| 3. |
Divide line 1 by line 2
|
3. |
.20
|
| 4. |
Tax-free amount. Multiply line 1 by line 3. (Caution: Do not include this amount on line 6 of Worksheet
A in this publication.)
|
4. |
$6,200
|
| 5. |
Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on line
16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet A in this publication.
|
5. |
$24,800
|
| |
Lump-sum payment in installments.
If you choose the alternative annuity option, you usually will receive the lump-sum payment in two equal installments.
You will receive the first
installment after you make the choice upon retirement. The second installment will be paid to you, with interest, in the next
calendar year.
(Exceptions to the installment rule are provided for cases of critical medical need.)
Even though the lump-sum payment is made in installments, the overall tax treatment (explained at the beginning of
this discussion) is the same as
if the whole payment were paid at once. If the payment has a tax-free part, you must treat the taxable part as received first.
How to report.
Add any actual or deemed payment of your lump-sum credit (defined earlier) to the total for Form 1040, line 16a, or
Form 1040A, line 12a. Add the
taxable part to the total for Form 1040, line 16b, or Form 1040A, line 12b, unless you roll over the taxable part to your
traditional IRA or a
qualified retirement plan.
If you receive the lump-sum payment in two installments, include any interest paid with the second installment on
line 8a of either Form 1040 or
Form 1040A.
If you have chosen to receive a lump-sum payment under the alternative annuity option, you also will receive reduced monthly
annuity payments.
These annuity payments each will have a tax-free and a taxable part. To figure the tax-free part of each annuity payment,
you must use the Simplified
Method (Worksheet A). For instructions on how to complete the worksheet, see Worksheet A under Simplified Method, earlier.
To complete Worksheet A, line 2, you must reduce your cost in the plan by the tax-free part of the lump-sum payment you received.
Enter as your net
cost on line 2 the amount from Worksheet B, line 5. Do not include the tax-free part of the lump-sum pay |
|
