Publication 721 |
2001 Tax Year |
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. If
you are the survivor of a federal employee, see Part IV.
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 or 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 1999 and began receiving a $1,147 per month CSRS retirement annuity with a survivor annuity payable to his wife, Kate, upon his
death. He reported 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 2001. 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 × $840/$1,500) of the tax-free monthly amount to her annuity and $33 ($150 × $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 × $840/$1,170) of the
$150 tax-free monthly amount to her annuity and $42 ($150 × $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, and the deceased retiree's annuity ends before an amount equal to
the deceased retiree'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 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.
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.
Figure the taxable and tax-free parts of your additional survivor annuity benefit from voluntary contributions using the same rules that apply to
regular CSRS and FERS survivor annuities, as explained earlier under CSRS or FERS Survivor Annuity.
Lump-sum payment.
Figure the taxable amount, if any, of a lump-sum payment of the retiree's unrecovered voluntary contributions plus any interest using the rules
that apply to regular lump-sum CSRS or FERS payments, as explained earlier under Lump-Sum CSRS or FERS Payment.
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 tax free. If you do not choose a direct rollover of the TSP account,
mandatory 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.
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