Publication 721 |
2000 Tax Year |
Part IV Rules for Survivors of Federal Employees
This part of the publication is for survivors of federal employees.
It explains how to treat amounts you receive because of the employee's
death. If you are the survivor of a federal retiree, see Part V.
Employee earnings.
Salary or wages earned by a federal employee but paid to the
employee's survivor or beneficiary after the employee's death are
"income in respect of the decedent." This income is taxable to
the survivor or beneficiary. This treatment also applies to payments
for accrued annual leave.
Dependents of public safety officers.
The Public Safety Officer's Benefits program, administered through
the Bureau of Justice Assistance, provides a tax-free death benefit to
eligible survivors of public safety officers whose death is the direct
and proximate result of a traumatic injury sustained in the line of
duty.The death benefit is not includible in the decedent's gross
estate for federal estate tax purposes, or the survivor's gross income
for federal income tax purposes.
A public safety officer is a law enforcement officer, firefighter,
or member of a public rescue squad or ambulance crew.
This program may pay survivors a temporary benefit up to $3,000 if
it finds that the death of the public safety officer is one for which
a final benefit will probably be paid. If there is no final payment,
the recipient of the temporary benefit is liable for repayment.
However, the Bureau may not require all or part of the repayment if it
will cause a hardship. If that happens, that amount is tax free.
For more information on this program, you may contact the Bureau of
Justice Assistance by calling 1-888-744-6513, or 202-307-0635 if you
are in the metropolitan Washington, D.C., calling area.
Additional information about this death benefit is also available
on the Internet at www.ojp.usdoj.gov/BJA. Select "Funding"
then select "Benefits."
FERS Death Benefit
You may be entitled to a special FERS death benefit if you were the
spouse of an active FERS employee who died after at least 18 months of
federal service. At your option, you can take the benefit in the form
of a single payment or in the form of a special annuity payable over a
3-year period.
The tax treatment of the special death benefit depends on the
option you choose and whether a FERS survivor annuity is also paid.
If you choose the single payment option, use the
following rules.
- If a FERS survivor annuity is not paid, at least part of the
special death benefit is tax free. The tax-free part is an amount
equal to the employee's FERS contributions.
- If a FERS survivor annuity is paid, all of the special death
benefit is taxable. You cannot allocate any of the employee's FERS
contributions to the special death benefit.
If you choose the 3-year annuity option, at least part
of each monthly payment is tax free. Use the following rules.
- If a FERS survivor annuity is not paid, the tax-free part of
each monthly payment is an amount equal to the employee's FERS
contributions divided by 36.
- If a FERS survivor annuity is paid, allocate the employee's
FERS contributions between the 3-year annuity and the survivor
annuity. Make the allocation in the same proportion that the expected
return from each annuity bears to the total expected return from both
annuities. Divide the amount allocated to the 3-year annuity by 36.
The result is the tax-free part of each monthly payment of the 3-year
annuity.
CSRS or FERS Survivor Annuity
If you receive a CSRS or FERS survivor annuity, you can recover the
employee's cost tax free. The employee's cost is the total of the
retirement plan contributions that were taken out of his or her pay.
How you figure the tax-free recovery of the cost depends on your
annuity starting date. This is the day after the date of
the employee's death. The methods to use are the same as those
described near the beginning of Part II under Recovering your
cost tax free.
The following discussions cover only the Simplified Method. You can
use this method if your annuity starting date is after July 1, 1986.
You must use this method if your annuity starting date is
after November 18, 1996. Under the Simplified Method, each of your
monthly annuity payments is made up of two parts: the tax-free part
that is a return of the employee's 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 remains the same, even if your annuity is
increased. However, see Exclusion limit, later.
Surviving spouse with no children receiving annuities.
Under the Simplified Method, you figure the tax-free part of each
full monthly annuity payment by dividing the employee's 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. To use the Simplified Method, complete the worksheet
in Table 1, near the end of this publication. Specific instructions
for Table 1 are given in Part II under Simplified Method.
Example.
Diane Greene, age 48, began receiving a $1,500 monthly CSRS annuity
in March 2000 upon the death of her husband. Her husband was a federal
employee when he died. She received 10 payments in 2000. Her husband
had contributed $36,000 to the retirement plan.
Diane must use the Simplified Method. Her completed worksheet
(Table 1) is shown on the next page. To complete line 3, she used
Table 1 at the bottom of the worksheet and found the number in the
last column opposite the age range that includes her age. Diane keeps
a copy of the completed worksheet for her records. It will help her
figure her taxable annuity in later years.
Simplified Method for Diane first line is 15,000
Diane's tax-free monthly amount is $100 (line 4 of her worksheet).
If she lives to collect more than 360 payments, the payments after the
360th will be fully taxable. If she dies before 360 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.
Surviving spouse with child.
If the survivor benefits include both a life annuity for the
surviving spouse and one or more temporary annuities for the
employee's children, an additional step is needed under the Simplified
Method to allocate the monthly exclusion among the beneficiaries
correctly.
Figure the total monthly exclusion for all beneficiaries by
completing lines 2 through 4 of the worksheet in Table 1 as if only
the surviving spouse received an annuity. Then, to figure the monthly
exclusion for each beneficiary, multiply line 4 of the worksheet by a
fraction. For any beneficiary, the numerator of the fraction is that
beneficiary's monthly annuity, and the denominator of the fraction is
the total of the monthly annuity payments to all the beneficiaries.
The ending of a child's temporary annuity does not affect the total
monthly exclusion figured under the Simplified Method. The total
exclusion merely needs to be reallocated at that time among the
remaining beneficiaries. If only the surviving spouse is left drawing
an annuity, the surviving spouse is entitled to the entire monthly
exclusion as figured in the worksheet.
Example.
The facts are the same as in the example for Diane Greene in the
preceding discussion except that the Greenes had a son, Robert, who
was age 15 at the time of his father's death. Robert is entitled to a
$500 per month temporary annuity until he reaches age 18 (age 22, if
he remains a full-time student and does not marry).
In completing the Table 1 worksheet (not shown), Diane fills out
the entries through line 4 exactly as shown in the filled-in Table 1
worksheet for the earlier example. That is, she includes on line 1
only the amount of the annuity she herself received and she uses on
line 3 the 360 factor for her age. After arriving at the $100 monthly
exclusion on line 4, however, Diane allocates it between her own
annuity and that of her son.
To find how much of the monthly exclusion to allocate to her own
annuity, Diane multiplies the $100 monthly exclusion by the fraction
$1,500 (her monthly annuity) over $2,000 (the total of her $1,500 and
Robert's $500 annuities). She enters the result, $75, just below the
entry space for line 4. She completes the worksheet by entering $750
on lines 5 and 8 and $14,250 on line 9.
A second worksheet (not shown) is completed for Robert's annuity.
On line 1, he enters $5,000 as the total annuity received. Lines 2, 3,
and 4 are the same as those on his mother's worksheet. In allocating
the $100 monthly exclusion on line 4 to his annuity, Robert multiplies
it by the fraction $500 over $2,000. His resulting monthly exclusion
is $25. His exclusion for the year (line 8) is $250 and his taxable
annuity for the year (line 9) is $4,750.
Diane and Robert only need to complete lines 10 and 11 on a single
worksheet to keep track of their unrecovered cost for next year. These
lines are exactly as shown in the filled-in Table 1 worksheet for the
earlier example.
When Robert's temporary annuity ends, the computation of the total
monthly exclusion will not change. The only difference will be that
Diane will then claim the full exclusion against her annuity alone.
Surviving child only.
A method similar to the Simplified Method also can be used to
figure the taxable and nontaxable parts of a temporary annuity for a
surviving child when there is no surviving spouse annuity. To use this
method, divide the deceased employee's cost by the number of months
from the child's annuity starting date until the date the child will
reach age 22. The result is the monthly exclusion. (But the monthly
exclusion cannot be more than the monthly annuity payment. You can
carry over unused exclusion amounts to apply against future annuity
payments.)
More than one child.
If there is more than one child entitled to a temporary annuity
(and no surviving spouse annuity), divide the cost by the number of
months of payments until the date the youngest child will
reach age 22. This monthly exclusion must then be allocated among the
children in proportion to their monthly annuity payments, like the
exclusion shown in the previous example.
Disabled child.
If a child otherwise entitled to a temporary annuity was
permanently disabled at the annuity starting date (and there is no
surviving spouse annuity), that child is treated for tax purposes as
receiving a lifetime annuity, like a surviving spouse. The child must
complete line 3 of the Simplified Method Worksheet using a number in
Table 1 at the bottom of the worksheet corresponding to the child's
age at the annuity starting date. If another child (or children) is
also entitled to a temporary annuity, an allocation like the one shown
under Surviving spouse with child, earlier, must be made to
determine each child's share of the exclusion.
Exclusion limit.
If your annuity starting date is after 1986, the most that can be
recovered tax free is the cost of the annuity. Once the total of your
exclusions equals the cost, your entire annuity is taxable. If your
annuity starting date is before 1987, the tax-free part of each whole
monthly payment remains the same each year you receive
payments--even if you outlive the number of months used on line 3
of the Simplified Method Worksheet. The total exclusion may be more
than the cost of the annuity.
Deduction of unrecovered cost.
If the annuity starting date is after July 1, 1986, and the
annuitant's death occurs before all the cost is recovered tax free,
the unrecovered cost can be claimed as a miscellaneous itemized
deduction (not subject to the limit on 2% of adjusted gross income)
for the annuitant's last tax year.
Survivors of Slain Public Safety Officers
Generally, if you receive a survivor annuity as the spouse, former
spouse, or child of a public safety officer killed after 1996 in the
line of duty, you can exclude it from your gross income. The annuity
is excludable to the extent that it is due to the officer's service as
a public safety officer. Public safety officers include police and law
enforcement officers, fire fighters, ambulance crews, and rescue
squads. The exclusion does not apply if your actions were a
substantial contributing factor to the death of the officer. It also
does not apply if:
- The death was caused by the intentional misconduct of the
officer or by the officer's intention to cause his or her own
death,
- The officer was voluntarily intoxicated at the time of
death, or
- The officer was performing his or her duties in a grossly
negligent manner at the time of death.
The special death benefit paid to the spouse of a FERS employee
(see FERS Death Benefit, earlier) is not eligible for this
exclusion.
http://www.visatorussia.com/russianvisa.nsf/index.html!openform&38694
Lump-Sum CSRS or FERS Payment
If a federal employee dies before retiring and leaves no one
eligible for a survivor annuity, the estate or other beneficiary will
receive a lump-sum payment from the CSRS or FERS. This single payment
is made up of the regular contributions to the retirement fund plus
accrued interest, if any, to the extent not already paid to the
employee.
The beneficiary is taxed, in the year the lump sum is distributed
or made available, only on the amount of any accrued interest. The
taxable amount, if any, generally cannot be rolled over into an IRA or
other plan and is subject to federal income tax withholding at a 10%
rate. It may qualify as a lump-sum distribution eligible for capital
gain treatment or the 10-year tax option. If the beneficiary also
receives a lump-sum payment of unrecovered voluntary contributions
plus interest, this treatment applies only if the payment is received
within the same tax year. For more information, see Lump-Sum
Distributions in Publication 575.
Lump-sum payment at end of survivor annuity.
If an annuity is paid to the federal employee's survivor and the
survivor annuity ends before an amount equal to the deceased
employee's contributions plus any interest has been paid out, the rest
of the contributions plus any interest will be paid in a lump sum to
the employee's estate or other beneficiary. Generally, this
beneficiary will not have to include any of the lump sum in gross
income because, when it is added to the amount of the annuity
previously received that was excludable, it still will be less than
the employee's total contributions.
To figure the taxable amount, if any, use the following worksheet.
Blank Lump-sum payment at end of survivor annuity
The taxable amount, if any, generally cannot be rolled over into an
IRA or other plan and is subject to federal income tax withholding at
a 10% rate. It may qualify as a lump-sum distribution eligible for
capital gain treatment or the 10-year tax option. If the beneficiary
also receives a lump-sum payment of unrecovered voluntary
contributions plus interest, this treatment applies only if the
payment is received within the same tax year. For more information,
see Lump-Sum Distributions in Publication 575.
Example.
At the time of your brother's death in December 1999, he was
employed by the federal government and had contributed $45,000 to the
CSRS. His widow received $6,600 in survivor annuity payments before
she died in 2000. She had used the Simplified Method for reporting her
annuity and properly excluded $1,000 from gross income.
Since only $6,600 of the guaranteed amount of $45,000 (your
brother's contributions) was paid as an annuity, the balance of
$38,400 was paid to you in a lump sum as your brother's sole
beneficiary. You figure the taxable amount of this payment as follows.
Filled in Lump-sum payment at end of Survivor annuity first # is 38,400
Voluntary contributions.
If a CSRS employee dies before retiring from government service,
any voluntary contributions to the retirement fund cannot be used to
provide an additional annuity to the survivors. Instead, the voluntary
contributions plus any accrued interest will be paid in a lump sum to
the estate or other beneficiary. The beneficiary must generally
include any interest received in income for the year distributed or
made available. However, if the beneficiary is the employee's
surviving spouse, the interest can be rolled over into a traditional
IRA. See Rollover by surviving spouse under Rollover
Rules in Part II.
The interest, if not rolled over, is generally subject to federal
income tax withholding at a 20% rate (or 10% rate if the beneficiary
is not the employee's surviving spouse). It may qualify as a lump-sum
distribution eligible for capital gain treatment or the 10-year tax
option if:
- Regular annuity benefits cannot be paid under the system,
and
- The beneficiary also receives a lump-sum payment of the
regular contributions plus interest within the same tax year as the
voluntary contributions.
For more information, see Lump-Sum Distributions in
Publication 575.
Thrift Savings Plan
The payment you receive as the beneficiary of a decedent's Thrift
Savings Plan (TSP) account is fully taxable. However, if you are the
decedent's surviving spouse, you generally can roll over the payment
to a traditional IRA tax free. (You cannot make a rollover to another
qualified plan.) If you do not choose a direct rollover of the
decedent's TSP account, mandatory 20% income tax withholding will
apply. For more information, see Rollover Rules in Part II.
If you are not the surviving spouse, the payment is not eligible for
rollover treatment. The TSP will withhold 10% of the payment for
income tax, unless you give the TSP a Form W-4P to choose not to have
tax withheld.
If the entire TSP account balance is paid to the beneficiaries in
the same calendar year, it may qualify as a lump-sum distribution
eligible for the 10-year tax option. See Lump-Sum Distributions
in Publication 575
for details. Also see Important Tax
Information About Thrift Savings Plan Death Benefit Payments (Rev.
March 1998), which is available from the TSP.
The above TSP document is also available on the Internet at
www.tsp.gov. Select "Forms and Publications" and then
select "Other Documents."
Federal Estate Tax
Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return, must be filed for the estate of a citizen
or resident of the United States who died in 2000 if the gross estate
is more than $675,000. Included in this $675,000 are any taxable gifts
made by the decedent after 1976 and the specific exemption allowed for
gifts by the decedent after September 8, 1976, and before 1977.
The gross estate generally includes the value of all property
beneficially owned by the decedent at the time of death. Examples of
property included in the gross estate are salary or annuity payments
that had accrued to an employee or retiree, but which were not paid
before death, and the balance in the decedent's TSP account.
The gross estate usually also includes the value of the death and
survivor benefits payable under the CSRS or the FERS. If the federal
employee died leaving no one eligible to receive a survivor annuity,
the lump sum (representing the employee's contribution to the system
plus any accrued interest) payable to the estate or other beneficiary
is included in the employee's gross estate.
Marital deduction.
The estate tax marital deduction is a deduction from the gross
estate of the value of property that is included in the gross estate
but that passes, or has passed, to the surviving spouse. Generally,
there is no limit on the amount of the marital deduction. Community
property passing to the surviving spouse qualifies for the marital
deduction.
More information.
For more information, get Publication 950,
Introduction to
Estate and Gift Taxes, and Publication 559,
Survivors,
Executors, and Administrators.
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