Publication 721 - Tax Guide To U.s. Civil Service Retirement Benefits

If you retired on disability before you reached

Under both the General Rule and the Simplified Method,

your minimum retirement age, see Part III,

Rules

each of your monthly annuity payments is made up of two

TIP

for Disability Retirement and Credit for the Elderly

parts: the tax-free part that is a return of your cost, and the

or the

Disabled. However, on the day after you reach your

taxable part that is the amount of each payment that is

more than the part that represents your cost (unless such

minimum retirement age use the rules in this section to

payment is used for purposes discussed under

Distribu-

report your disability retirement and begin recovering your

tions Used To Pay Insurance Premiums for Public Safety

cost.

Officers, later). The tax-free part is a fixed dollar amount. It

Annuity statement. The statement you received from

remains the same, even if your annuity is increased. Gen-

OPM when your CSRS or FERS annuity was approved

erally, this rule applies as long as you receive your annuity.

shows the commencing date (the annuity starting date),

However, see

Exclusion

limit, later.

the gross monthly rate of your annuity benefit, and your

total contributions to the retirement plan (your cost). You

Choosing a survivor annuity after retirement. If you

will use this information to figure the tax-free recovery of

retired without a survivor annuity and report your annuity

under the Simplified Method, do not change your tax-free

your cost.

monthly amount even if you later choose a survivor annu-

Annuity starting date. If you retire from federal gov-

ity.

ernment service on a regular annuity, your annuity starting

If you retired without a survivor annuity and report your

date is the commencing date on your annuity statement

annuity under the General Rule, you must figure the

from OPM. If something delays payment of your annuity,

tax-free part of your annuity using a new exclusion per-

such as a late application for retirement, it does not affect

centage if you later choose a survivor annuity and take

the date your annuity begins to accrue or your annuity

reduced annuity payments. To figure the new exclusion

starting date.

percentage, reduce your cost by the amount you previ-

ously recovered tax free. Figure the expected return as of

Gross monthly rate. This is the amount you were to

the date the reduced annuity begins. For details on the

get after any adjustment for electing a survivor’s annuity or

General Rule, see Publication 939.

for electing the lump-sum payment under the alternative

annuity option (if either applied) but before any deduction

Canceling a survivor annuity after retirement. If you

for income tax withholding, insurance premiums, etc.

retired with a survivor annuity payable to your spouse upon

your death and you notify OPM that your marriage has

Your cost. Your monthly annuity payment contains an

ended, your annuity might be increased to remove the

amount on which you have previously paid income tax.

reduction for a survivor benefit. The increased annuity

This amount represents part of your contributions to the

does not change the cost recovery you figured at the

retirement plan. Even though you did not receive the

annuity starting date. The tax-free part of each annuity

money that was contributed to the plan, it was included in

payment remains the same.

your gross income for federal income tax purposes in the

years it was taken out of your pay.

For more information about choosing or cancel-

ing a survivor annuity after retirement, contact

The cost of your annuity is the total of your contributions

OPM’s Retirement Information Office at

to the retirement plan, as shown on your annuity statement

1-888-767-6738 (customers within the local Washington,

from OPM. If you elected the alternative annuity option, it

D.C. calling area must call 202-606-0500).

includes any deemed deposits and any deemed redepos-

its that were added to your lump-sum credit. (See

Lump-sum credit

under Alternative Annuity Option, later.)

Exclusion limit. Your annuity starting date determines

the total amount of annuity payments that you can exclude

If you repaid contributions that you had withdrawn from

from income over the years.

the retirement plan earlier, or if you paid into the plan to

receive full credit for service not subject to retirement

Annuity starting date after 1986. If your annuity start-

deductions, the entire repayment, including any interest, is

ing date is after 1986, the total amount of annuity income

a part of your cost. You cannot claim an interest deduction

that you (or the survivor annuitant) can exclude over the

for any interest payments. You cannot treat these pay-

years as a return of your cost cannot exceed your total

ments as voluntary contributions; they are considered reg-

cost. Annuity payments you or your survivors receive after

ular employee contributions.

the total cost in the plan has been recovered are generally

fully taxable.

Recovering your cost tax free. How you figure the

tax-free recovery of the cost of your CSRS or FERS annu-

Example. Your annuity starting date is after 1986 and

ity depends on your annuity starting date.

you exclude $100 a month under the Simplified Method. If

your cost is $12,000, the exclusion ends after 10 years

•

If your annuity starting date is before July 2, 1986,

(120 months). Thereafter, your entire annuity is generally

either the

Three-Year Rule

or the

General Rule

(both

fully taxable.

discussed later) applies to your annuity.

Annuity starting date before 1987. If your annuity

•

If your annuity starting date is after July 1, 1986, and

starting date is before 1987, you can continue to take your

before November 19, 1996, you could have chosen

monthly exclusion figured under the General Rule or Sim-

to use either the

General Rule

or the

Simplified

plified Method for as long as you receive your annuity. If

Method

(discussed later).

you chose a joint and survivor annuity, your survivor can

•

If your annuity starting date is after November 18,

continue to take that same exclusion. The total exclusion

1996, you must use the

Simplified

Method.

may be more than your cost.

Publication 721 (2011)

Page 5

Publication 721 - Tax Guide To U.s. Civil Service Retirement Benefits - 2011 Page 5

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