Publication 721 - Tax Guide To U.s. Civil Service Retirement Benefits - 2002 Page 5
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28If you repaid contributions that you had withdrawn from
Exclusion limit. If your annuity starting date is after 1986,
the total amount of annuity income that you (or the survivor
the retirement plan earlier, or if you paid into the plan to
annuitant) can exclude over the years as a return of your
receive full credit for service not subject to retirement
cost may not exceed your total cost. Annuity payments you
deductions, the entire repayment, including any interest, is
or your survivors receive after the total cost in the plan has
a part of your cost. You cannot claim an interest deduction
been recovered are fully taxable.
for any interest payments. You cannot treat these pay-
ments as voluntary contributions; they are considered reg-
Example. Your annuity starting date is after 1986 and
ular employee contributions.
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.
Recovering your cost tax free. How you figure the
tax-free recovery of the cost of your CSRS or FERS annu-
Annuity starting date before 1987. If your annuity
ity depends on your annuity starting date.
starting date is before 1987, you continue to take your
monthly exclusion figured under the General Rule or Sim-
•
If your annuity starting date is before July 2, 1986,
plified Method for as long as you receive your annuity. If
either the Three-Year Rule or the General Rule (both
you chose a joint and survivor annuity, your survivor con-
discussed later) applies to your annuity.
tinues to take that same exclusion. The total exclusion may
•
be more than your cost.
If your annuity starting date is after July 1, 1986, and
before November 19, 1996, you could have chosen
Deduction of unrecovered cost. If your annuity starting
to use either the General Rule or the Simplified
date is after July 1, 1986, and the cost of your annuity has
Method.
not been fully recovered at your (or the survivor
•
annuitant’s) death, a deduction is allowed for the unrecov-
If your annuity starting date is after November 18,
ered cost. The deduction is claimed on your (or your
1996, you must use the Simplified Method.
survivor’s) final tax return as a miscellaneous itemized
deduction (not subject to the 2%-of-adjusted-gross-in-
Under both the General Rule and the Simplified Method,
come limit). If your annuity starting date is before July 2,
each of your monthly annuity payments is made up of two
1986, no tax benefit is allowed for any unrecovered cost at
parts: the tax-free part that is a return of your cost, and the
death.
taxable part that is the amount of each payment that is
more than the part that represents your cost. The tax-free
Simplified Method
part is a fixed dollar amount. It remains the same, even if
your annuity is increased. Generally, this rule applies as
If your annuity starting date is after November 18, 1996,
long as you receive your annuity. However, see Exclusion
you must use the Simplified Method to figure the tax-free
limit, later.
part of your CSRS or FERS annuity. (OPM has figured the
taxable amount of your annuity shown on your Form CSA
Choosing a survivor annuity after retirement. If you
1099R using the Simplified Method.) You could have cho-
retired without a survivor annuity and report your annuity
sen to use either the Simplified Method or the General
under the Simplified Method, do not change your tax-free
Rule if your annuity starting date is after July 1, 1986, but
monthly amount even if you later choose a survivor annu-
before November 19, 1996. The Simplified Method does
ity.
not apply if your annuity starting date is before July 2,
1986.
If you retired without a survivor annuity and report your
Under the Simplified Method, you figure the tax-free part
annuity under the General Rule, you must figure a new
of each full monthly payment by dividing your cost by a
exclusion percentage if you later choose a survivor annu-
number of months based on your age. This number will
ity. To figure it, reduce your cost by the amount you
differ depending on whether your annuity starting date is
previously recovered tax free. Figure the expected return
on or before November 18, 1996, or later. If your annuity
as of the date the reduced annuity begins. For details on
starting date is after 1997 and your annuity includes a
the General Rule, see Publication 939.
survivor benefit for your spouse, this number is based on
your combined ages.
Canceling a survivor annuity after retirement. If you
notify OPM that your marriage has ended, your annuity
Worksheet A. Use Worksheet A, Simplified Method (near
might be increased to remove the reduction for a survivor
the end of this publication), to figure your taxable annuity.
benefit. The increased annuity does not change the cost
Be sure to keep the completed worksheet. It will help you
recovery you figured at the annuity starting date. The
figure your taxable amounts for later years.
tax-free part of each annuity payment remains the same.
Instead of Worksheet A, you generally can use
For more information about choosing or cancel-
TIP
the Simplified Method Worksheet in the instruc-
ing a survivor annuity after retirement, contact
tions for Form 1040 or Form 1040A to figure your
OPM’s Retirement Information Office at
taxable annuity. However, you must use Worksheet A and
1 –888 – 767 –6738 (customers within the local Washing-
Worksheet B in this publication if you chose the alternative
ton, D.C. calling area must call 202 – 606 – 0500).
annuity option. See Alternative Annuity Option, later.
Page 5
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