Part V Rules for Survivors of Federal Retirees

This part of the publication is for survivors of federal retirees. It explains how to treat amounts you receive because of the retiree's death.

Decedent's retirement benefits. Retirement benefits accrued and payable to a CSRS or FERS retiree before death, but paid to you as a survivor, are taxable in the same manner and to the same extent these benefits would have been taxable had the retiree lived to receive them.

CSRS or FERS Survivor Annuity

CSRS or FERS annuity payments you receive as the surviving spouse of a federal retiree are fully taxable or are partly taxable under either the General Rule or the Simplified Method.

Cost recovered. If the retiree reported the annuity under the Three-Year Rule and recovered all of the cost tax free before dying, your survivor annuity payments are fully taxable. This is also true if the retiree had an annuity starting date after 1986, reported the annuity under the General Rule or the Simplified Method, and had fully recovered the cost tax free.

General Rule. If the retiree was reporting the annuity under the General Rule, use the same exclusion percentage that the retiree used. Apply the exclusion percentage to the amount specified as your survivor annuity at the retiree's annuity starting date. Do not apply the exclusion percentage to any cost-of-living increases made after that date. Those increases are fully taxable. For more information about the General Rule, get Publication 939.

Simplified Method. If the retiree was reporting the annuity under the Simplified Method, your tax-free monthly amount is the same as the retiree's monthly exclusion (from line 4 of the Simplified Method Worksheet). This amount remains fixed even if the monthly payment is increased or decreased. A cost-of-living increase in your survivor annuity payments does not change the amount you can exclude from gross income.

Exclusion limit. If the retiree's annuity starting date was before 1987, you can exclude the tax-free amount from all the annuity payments you receive. This includes any payments received after you recover the cost tax free.

If the retiree's annuity starting date is after 1986, you can exclude the tax-free amount only until you recover the cost tax free. The annuity payments you receive after you recover the annuity cost tax free are fully taxable.

Deduction of unrecovered cost. If the annuity starting date is after July 1, 1986, and the survivor 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 2%-of-adjusted-gross-income limit) for the annuitant's last tax year.

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 retiree's children, the tax-free monthly amount that would otherwise apply to the life annuity must be allocated among the beneficiaries. To figure the tax-free monthly amount for each beneficiary, multiply it by a fraction. The numerator of the fraction is the beneficiary's monthly annuity, and the denominator of the fraction is the total of the monthly annuity payments to all the beneficiaries.

Example. John retired in 1998 and began receiving a $1,147 per month CSRS retirement annuity with a survivor annuity payable to his wife, Kate, upon his death. He chose to report his annuity using the Simplified Method. Under that method, $150 of each payment he received was a tax-free recovery of his $45,000 cost. John received a total of 22 monthly payments and recovered $3,300 of his cost tax free before his death in 2000. At John's death, Kate began receiving an annuity of $840 per month and their children, Sam and Lou, began receiving temporary annuities of $330 each per month. Kate must allocate the $150 tax-free monthly amount among the three annuities.

Kate allocates $84 ($150 x $840/$1,500) of the tax-free monthly amount to her annuity and $33 ($150 x $330/$1,500) to each child's annuity. Beginning the month in which either child is no longer eligible for an annuity, she will reallocate $108 ($150 x $840/$1,170) of the $150 tax-free monthly amount to her annuity and $42 ($150 x $330/$1,170) to the other child's annuity.

Surviving child only. If the survivor benefits include only a temporary annuity for the retiree's child, allocate the unrecovered cost over the number of months from the date the annuity started until the child reaches age 22. If more than one temporary annuity is paid, allocate the cost over the number of months until the youngest child reaches age 22, and allocate the tax-free monthly amount among the annuities in proportion to the monthly annuity payments.

Lump-Sum CSRS or FERS Payment

If a deceased retiree has no beneficiary eligible to receive a survivor annuity, the retiree's unrecovered CSRS or FERS contributions plus accrued interest, if any, will be paid in a lump sum to the estate or other beneficiary. The estate or other beneficiary will rarely have to include any part of the lump sum in gross income. The taxable amount is figured as follows.

Blank lump-sum payment to the estate or other beneficiary

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.

Voluntary Contributions

If you receive an additional survivor annuity benefit from voluntary contributions to the CSRS, treat it separately from the annuity that comes from regular contributions. Each year you will receive Form CSF 1099R that will show how much of your total annuity received in the past year was from each type of benefit.

If, before death, the retiree was receiving additional annuity payments from voluntary contributions and was reporting them under the General Rule, use the retiree's exclusion percentage. Apply the exclusion percentage to your additional survivor annuity benefits as of the retiree's annuity starting date. If the retiree was reporting the payments under the Simplified Method, use the same monthly exclusion amount that the retiree used. If the annuity starting date was after 1986, the total exclusion is limited to the amount of the voluntary contributions. After the total of these contributions has been recovered tax free, the additional annuity payments are fully taxable.

Lump-sum payment. If at the time of the retiree's death there was no one eligible to receive a survivor annuity, the retiree's unrecovered voluntary contributions plus any interest will be paid in a lump sum to the estate or other beneficiary. Part of the lump-sum payment may be taxable to the beneficiary. To figure the taxable amount, add the lump-sum payment to any tax-free amounts received by the retiree and subtract the retiree's total voluntary contributions. The excess, if any, is taxable. See Lump-Sum CSRS or FERS Payment, earlier.

Thrift Savings Plan

If you receive a payment from the TSP account of a deceased federal retiree, the payment is fully taxable. However, if you are the retiree's surviving spouse, you generally can roll over the otherwise taxable 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 TSP account, 20% federal income tax withholding will apply. For more information, see Rollover Rules in Part II, earlier. If you are not the surviving spouse, the payment is not eligible for rollover treatment. The TSP will withhold 10% of the payment for federal income tax, unless you give the TSP a Form W-4P to choose not to have tax withheld.

If the retiree chose to receive his or her account balance as an annuity, the payments you receive as the retiree's survivor are fully taxable when you receive them, whether they are received as annuity payments or as a cash refund of the remaining value of the amount used to purchase the annuity.

Federal Estate Tax

A federal estate tax return may have to be filed for the estate of the retired employee. See Federal Estate Tax in Part IV.

Income Tax Deduction for Estate Tax Paid

Any income that a decedent had a right to receive and could have received had death not occurred and that was not properly includible in the decedent's final income tax return is treated as income in respect of a decedent. This includes retirement benefits accrued and payable to a retiree before death, but paid to you as a survivor.

If you are required to include income in respect of a decedent in gross income for any tax year, you can deduct for the same tax year the portion of the federal estate tax imposed on the decedent's estate that is from the inclusion in the estate of the right to receive that amount. For this purpose, if the decedent died after the annuity starting date, the taxable portion of a survivor annuity you receive (other than a temporary annuity for a child) is considered income in respect of a decedent.

The federal estate tax you can deduct is determined by comparing the actual federal estate tax and the tax that would have been paid if the income in respect of the decedent were not included in the gross estate.

Income tax deductions for the estate tax on the value of your survivor annuity will be spread over the period of your life expectancy. The deductions cannot be taken beyond your life expectancy. Moreover, if you should die before the end of this period, there is no compensating adjustment for the unused deductions.

If the income in respect of the decedent is ordinary income, the estate tax must be deducted as a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income limit).

For more information, see Income in Respect of the Decedent in Publication 559, Survivors, Executors, and Administrators.

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