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

Deduction of unrecovered cost. If your annuity starting

Example. Bill Smith retired from the Federal Govern-

date is after July 1, 1986, and the cost of your annuity has

ment on March 31, 2011, under an annuity that will provide

not been fully recovered at your (or the survivor annui-

a survivor benefit for his wife, Kathy. His annuity starting

tant’s) death, a deduction is allowed for the unrecovered

date is April 1, 2011, the annuity is paid in arrears, and he

cost. The deduction is claimed on your (or your survivor’s)

received his first monthly annuity payment on May 1, 2011.

final tax return as a miscellaneous itemized deduction (not

He must use the Simplified Method to figure the tax-free

subject to the 2%-of-adjusted-gross-income limit). If your

part of his annuity benefits.

annuity starting date is before July 2, 1986, no tax benefit is

Bill’s monthly annuity benefit is $1,000. He had contrib-

allowed for any unrecovered cost at death.

uted $31,000 to his retirement plan and had received no

distributions before his annuity starting date. At his annuity

Simplified Method

starting date, he was 65 and Kathy was 57.

Bill’s completed Worksheet A is shown on the next

If your annuity starting date is after November 18, 1996,

page. To complete line 3, he used Table 2 at the bottom of

you must use the Simplified Method to figure the tax-free

the worksheet and found that 310 is the number in the

part of your CSRS or FERS annuity. (OPM has figured the

second column opposite the age range that includes 122

taxable amount of your annuity shown on your Form CSA

(his and Kathy’s combined ages). Bill keeps a copy of the

1099R using the Simplified Method.) You could have cho-

completed worksheet for his records. It will help him (and

sen to use either the Simplified Method or the General

Kathy, if she survives him) figure the taxable amount of the

Rule if your annuity starting date is after July 1, 1986, but

annuity in later years.

before November 19, 1996. The Simplified Method does

Bill’s tax-free monthly amount is $100. (See line 4 of the

not apply if your annuity starting date is before July 2,

worksheet.) If he lives to collect more than 310 monthly

1986.

payments, he will generally have to include in his gross

Under the Simplified Method, you figure the tax-free part

income the full amount of any annuity payments received

of each full monthly payment by dividing your cost by a

after 310 payments have been made.

number of months based on your age. This number will

If Bill does not live to collect 310 monthly payments and

differ depending on whether your annuity starting date is

his wife begins to receive monthly payments, she also will

before November 19, 1996, or after November 18, 1996. If

exclude $100 from each monthly payment until 310 pay-

your annuity starting date is after 1997 and your annuity

ments (Bill’s and hers) have been collected. If she dies

includes a survivor benefit for your spouse, this number is

before 310 payments have been made, a miscellaneous

based on your combined ages.

itemized deduction (not subject to the 2%-of-adjusted-

Worksheet A. Use

Worksheet A. Simplified Method

(near

gross-income limit) will be allowed for the unrecovered

the end of this publication), to figure your taxable annuity.

cost on her final income tax return.

Be sure to keep the completed worksheet. It will help you

figure your taxable amounts for later years.

General Rule

Instead of Worksheet A, you generally can use

If your annuity starting date is after November 18, 1996,

TIP

the Simplified Method Worksheet in the instruc-

you cannot use the General Rule to figure the tax-free part

tions for Form 1040, Form 1040A, or Form

of your CSRS or FERS annuity. If your annuity starting

1040NR to figure your taxable annuity. However, you must

date is after July 1, 1986, but before November 19, 1996,

use

Worksheet A

and

Worksheet B

in this publication if you

you could have chosen to use either the General Rule or

chose the

alternative annuity

option, discussed later.

the Simplified Method. If your annuity starting date is

Line 2. See

Your

cost, earlier, for an explanation of your

before July 2, 1986, you could have chosen to use the

General Rule only if you could not use the Three-Year

cost in the plan. If your annuity starting date is after No-

vember 18, 1996, and you chose the

alternative annuity

Rule.

option

(explained later), you must reduce your cost by the

Under the General Rule, you figure the tax-free part of

tax-free part of the lump-sum payment you received.

each full monthly payment by multiplying the initial gross

monthly rate of your annuity by an exclusion percentage.

Line 3. The number you enter on line 3 is the number of

Figuring this percentage is complex and requires the use

monthly annuity payments under the plan. Find the appro-

of actuarial tables. For these tables and other information

priate number from one of the tables at the bottom of the

about using the General Rule, see Publication 939.

worksheet. If your annuity starting date is after 1997, use:

•

Table 1 for an annuity without a survivor benefit, or

Three-Year Rule

•

Table 2 for an annuity with a survivor benefit.

If your annuity starting date was before July 2, 1986, you

If your annuity starting date is before 1998, use Table 1.

probably had to report your annuity using the Three-Year

Rule. Under this rule, you excluded all the annuity pay-

Line 6. If you retired before 2011, the amount previ-

ments from income until you fully recovered your cost.

ously recovered tax free that you must enter on line 6 is the

After your cost was recovered, all payments became fully

total amount from line 10 of last year’s worksheet. If your

taxable. You cannot use another rule to again exclude

annuity starting date is before November 19, 1996, and

amounts from income.

you chose the alternative annuity option, this amount in-

cludes the tax-free part of the lump-sum payment you

The Three-Year Rule was repealed for retirees whose

annuity starting date is after July 1, 1986.

received.

Page 6

Publication 721 (2011)

Publication 721 - Tax Guide To U.s. Civil Service Retirement Benefits - 2011 Page 6

Related Articles

Related forms

Related Categories