Publication 721 - Tax Guide To U.s. Civil Service Retirement Benefits - 2002 Page 22
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28reported his annuity using the Simplified Method. Under
CSRS or FERS Survivor Annuity
that method, $150 of each payment he received was a
CSRS or FERS annuity payments you receive as the
tax-free recovery of his $45,000 cost. John received a total
surviving spouse of a federal retiree are fully or partly
of 22 monthly payments and recovered $3,300 of his cost
taxable under either the General Rule or the Simplified
tax free before his death in 2002. At John’s death, Kate
Method.
began receiving an annuity of $840 per month and their
children, Sam and Lou, began receiving temporary annui-
Cost recovered. If the retiree reported the annuity under
ties of $330 each per month. Kate must allocate the $150
the Three-Year Rule and recovered all of the cost tax free
tax-free monthly amount among the three annuities.
before dying, your survivor annuity payments are fully
Kate allocates $84 ($150 × $840/$1,500) of the tax-free
taxable. This is also true if the retiree had an annuity
monthly amount to her annuity and $33 ($150 × $330/
starting date after 1986, reported the annuity under the
$1,500) to each child’s annuity. Beginning the month in
General Rule or the Simplified Method, and had fully re-
which either child is no longer eligible for an annuity, she
covered the cost tax free.
will reallocate $108 ($150 × $840/$1,170) of the $150
tax-free monthly amount to her annuity and $42 ($150 ×
General Rule. If the retiree was reporting the annuity
under the General Rule, use the same exclusion percent-
$330/$1,170) to the other child’s annuity.
age that the retiree used. Apply the exclusion percentage
to the amount specified as your survivor annuity at the
Surviving child only. If the survivor benefits include only
retiree’s annuity starting date. Do not apply the exclusion
a temporary annuity for the retiree’s child, allocate the
percentage to any cost-of-living increases made after that
unrecovered cost over the number of months from the date
date. Those increases are fully taxable. For more informa-
the annuity started until the child reaches age 22. If more
tion about the General Rule, get Publication 939.
than one temporary annuity is paid, allocate the cost over
the number of months until the youngest child reaches
Simplified Method. If the retiree was reporting the annu-
age 22, and allocate the tax-free monthly amount among
ity under the Simplified Method, your tax-free monthly
the annuities in proportion to the monthly annuity pay-
amount is the same as the retiree’s monthly exclusion
ments.
(from line 4 of Worksheet A). This amount remains fixed
even if the monthly payment is increased or decreased. A
Lump-Sum CSRS or FERS Payment
cost-of-living increase in your survivor annuity payments
does not change the amount you can exclude from gross
If a deceased retiree has no beneficiary eligible to receive
income.
a survivor annuity, and the deceased retiree’s annuity ends
Exclusion limit. If the retiree’s annuity starting date was
before an amount equal to the deceased retiree’s contribu-
before 1987, you can exclude the tax-free amount from all
tions plus any interest has been paid out, the rest of the
the annuity payments you receive. This includes any pay-
contributions plus any interest will be paid in a lump sum to
ments received after you recover the cost tax free.
the estate or other beneficiary. The estate or other benefi-
If the retiree’s annuity starting date is after 1986, you
ciary rarely will have to include any part of the lump sum in
can exclude the tax-free amount only until you recover the
gross income. The taxable amount is figured as follows.
cost tax free. The annuity payments you receive after you
recover the annuity cost tax free are fully taxable.
Worksheet E. Lump-Sum Payment to Estate
or Other Beneficiary
Deduction of unrecovered cost. If the annuity starting
date is after July 1, 1986, and the survivor annuitant’s
1. Enter the lump-sum payment . . . . . 1.
death occurs before all the cost is recovered tax free, the
2. Enter the amount of annuity received
unrecovered cost can be claimed as a miscellaneous item-
tax free by the retiree . . . . . . . . . . . 2.
ized deduction (not subject to the 2%-of-adjusted-gross-in-
3. Add lines 1 and 2 . . . . . . . . . . . . . . 3.
come limit) for the annuitant’s last tax year.
4. Enter the total cost . . . . . . . . . . . . . 4.
Surviving spouse with child. If the survivor benefits in-
5. Taxable amount. Subtract line 4
clude both a life annuity for the surviving spouse and one
from line 3. Enter the result, but not
or more temporary annuities for the retiree’s children, the
less than zero . . . . . . . . . . . . . . . . . 5.
tax-free monthly amount that would otherwise apply to the
life annuity must be allocated among the beneficiaries. To
The taxable amount, if any, generally cannot be rolled
figure the tax-free monthly amount for each beneficiary,
over into an IRA or other plan and is subject to federal
multiply it by a fraction. The numerator of the fraction is the
income tax withholding at a 10% rate. It may qualify as a
beneficiary’s monthly annuity and the denominator of the
lump-sum distribution eligible for capital gain treatment or
fraction is the total of the monthly annuity payments to all
the 10-year tax option. If the beneficiary also receives a
the beneficiaries.
lump-sum payment of unrecovered voluntary contributions
plus interest, this treatment applies only if the payment is
Example. John retired in 2000 and began receiving a
received within the same tax year. For more information,
$1,147 per month CSRS retirement annuity with a survivor
annuity payable to his wife, Kate, upon his death. He
see Lump-Sum Distributions in Publication 575.
Page 22
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