Simplified Method
If your annuity starting date is after November 18, 1996, you must use the Simplified Method to figure the tax-free part of your CSRS or FERS annuity. (OPM has figured the taxable amount of your annuity shown on your Form CSA 1099R using the Simplified Method.) You could have chosen to use either the Simplified Method or the General Rule if your annuity starting date is after July 1, 1986, but before November 19, 1996. The Simplified Method does not apply if your annuity starting date is before July 2, 1986.
Under the Simplified Method, you figure the tax-free part of each full monthly payment by dividing your 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. If your annuity starting date is after 1997 and your annuity includes a survivor benefit for your spouse, this number is based on your combined ages.
Worksheet A. Use Worksheet A, Simplified Method (near the end of this publication), to figure your taxable annuity. Be sure to keep the completed worksheet. It will help you figure your taxable amounts for later years.
Instead of Worksheet A, you generally can use the Simplified Method Worksheet in the instructions for Form 1040 or Form 1040A to figure your taxable annuity. However, you must use Worksheet A and Worksheet B in this publication if you chose the alternative annuity option. See Alternative Annuity Option, later.
Line 2. See Your cost, earlier, for an explanation of your cost in the plan. If your annuity starting date is after November 18, 1996, and you chose the alternative annuity option (explained later), you must reduce your cost by the tax-free part of the lump-sum payment you received.
Line 3. Find the appropriate number from one of the tables at the bottom of the worksheet. If your annuity starting date is after 1997, use:
- Table 1 for an annuity without a survivor benefit, or
- Table 2 for an annuity with a survivor benefit.
If your annuity starting date is before 1998, use Table 1.
Line 6. If you retired before 2002, the amount previously recovered tax free that you must enter on line 6 is the total amount from line 10 of last year's worksheet. If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, it includes the tax-free part of the lump-sum payment you received.
Example. Bill Kirkland retired from the federal government on April 30, 2002, under an annuity that will provide a survivor benefit for his wife, Kathy. His annuity starting date is May 3, 2002. He must use the Simplified Method to figure the tax-free part of his annuity benefits.
Bill's monthly annuity benefit is $1,000. He had contributed $31,000 to his retirement plan and had received no distributions before his annuity starting date. At his annuity starting date, he was 65 and Kathy was 57.
Bill's completed Worksheet A is shown on the next page. To complete line 3, he used Table 2 at the bottom of the worksheet and found the number in the second column opposite the age range that includes 122 (his and Kathy's combined ages). Bill keeps a copy of the completed worksheet for his records. It will help him (and Kathy, if she survives him) figure the taxable amount of the annuity in later years.
Filled-In Worksheet A. Simplified Method for Bill Kirkland Keep for Your Records See the instructions in Part II of this publication under Simplified Method.
| 1. |
Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a |
|
|
|
1. |
$ 8,000 |
| 2. |
Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion * |
|
|
|
2. |
31,000 |
| |
Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3. |
|
|
|
|
|
| 3. |
Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 |
|
|
|
3. |
310 |
| 4. |
Divide line 2 by line 3 |
|
|
|
4. |
100 |
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 |
|
|
|
5. |
800 |
| 6. |
Enter any amounts previously recovered tax free in years after 1986 |
|
|
|
6. |
0 |
| 7. |
Subtract line 6 from line 2 |
|
|
|
7. |
31,000 |
| 8. |
Enter the smaller of line 5 or line 7 |
|
|
|
8. |
800 |
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead |
|
|
|
9. |
$ 7,200 |
| 10. |
Add lines 6 and 8 |
|
|
|
10. |
800 |
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2 |
|
|
|
11. |
$ 30,200 |
| Table 1 for Line 3 Above |
| | IF the age at annuity starting date was |
| AND your annuity starting date was - |
| |
|
before November 19, 1996, enter on line 3 | after November 18, 1996, enter on line 3 |
| | 55 or under |
300 | 360 |
| | 56-60 |
260 | 310 |
| | 61-65 |
240 | 260 |
| | 66-70 |
170 | 210 |
| | 71 or over |
120 | 160 |
| Table 2 for Line 3 Above |
| |
IF the combined ages at annuity starting date were |
|
THEN enter on line 3 |
|
|
|
| |
110 or under |
|
410 |
|
|
|
| |
111-120 |
|
360 |
|
|
|
| |
121-130 |
|
310 |
|
|
|
| |
131-140 |
|
260 |
|
|
|
| |
141 or over |
|
210 |
|
|
|
| *A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. |
Example. Bill Kirkland - Filled in Worksheet A
Filled-In Worksheet A. Simplified Method for Bill Kirkland Keep for Your Records See the instructions in Part II of this publication under Simplified Method.
| 1. |
Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a |
|
|
|
1. |
$ 8,000 |
| 2. |
Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion * |
|
|
|
2. |
31,000 |
| |
Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3. |
|
|
|
|
|
| 3. |
Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 |
|
|
|
3. |
310 |
| 4. |
Divide line 2 by line 3 |
|
|
|
4. |
100 |
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 |
|
|
|
5. |
800 |
| 6. |
Enter any amounts previously recovered tax free in years after 1986 |
|
|
|
6. |
0 |
| 7. |
Subtract line 6 from line 2 |
|
|
|
7. |
31,000 |
| 8. |
Enter the smaller of line 5 or line 7 |
|
|
|
8. |
800 |
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead |
|
|
|
9. |
$ 7,200 |
| 10. |
Add lines 6 and 8 |
|
|
|
10. |
800 |
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2 |
|
|
|
11. |
$ 30,200 |
| Table 1 for Line 3 Above |
| | IF the age at annuity starting date was |
| AND your annuity starting date was - |
| |
|
before November 19, 1996, enter on line 3 | after November 18, 1996, enter on line 3 |
| | 55 or under |
300 | 360 |
| | 56-60 |
260 | 310 |
| | 61-65 |
240 | 260 |
| | 66-70 |
170 | 210 |
| | 71 or over |
120 | 160 |
| Table 2 for Line 3 Above |
| |
IF the combined ages at annuity starting date were |
|
THEN enter on line 3 |
|
|
|
| |
110 or under |
|
410 |
|
|
|
| |
111-120 |
|
360 |
|
|
|
| |
121-130 |
|
310 |
|
|
|
| |
131-140 |
|
260 |
|
|
|
| |
141 or over |
|
210 |
|
|
|
| *A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. |
Bill's tax-free monthly amount is $100. (See line 4 of the worksheet.) If he lives to collect more than 310 monthly payments, he will have to include in his gross income the full amount of any annuity payments received after 310 payments have been made.
If Bill does not live to collect 310 monthly payments and his wife begins to receive monthly payments, she also will exclude $100 from each monthly payment until 310 payments (Bill's and hers) have been collected. If she dies before 310 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.
General Rule
If your annuity starting date is after November 18, 1996, you cannot use the General Rule to figure the tax-free part of your CSRS or FERS annuity. If your annuity starting date is after July 1, 1986, but before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. If your annuity starting date is before July 2, 1986, you could have chosen to use the General Rule only if you could not use the Three-Year Rule.
Under the General Rule, you figure the tax-free part of each full monthly payment by multiplying the initial gross monthly rate of your annuity by an exclusion percentage. Figuring this percentage is complex and requires the use of actuarial tables. For these tables and other information about using the General Rule, see Publication 939.
Three-Year Rule
If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the Three-Year Rule. Under this rule, you excluded all the annuity payments from income until you fully recovered your cost. After your cost was recovered, all payments became fully taxable. You cannot use another rule to again exclude amounts from income.
The Three-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986.
Alternative Annuity Option
If you are a nondisability retiree under either CSRS or FERS, you may be able to choose the alternative annuity option. This option generally is available only to retirees with certain life-threatening illnesses or other critical medical conditions. If you choose this option, you will receive a lump-sum payment equal to your total regular contributions to the retirement plan plus any interest that applies. Your monthly annuity is then reduced by about 5 to 15 percent to adjust for this payment.
Lump-Sum Payment
The lump-sum payment you receive under the alternative annuity option generally has a tax-free part and a taxable part. The tax-free part represents part of your cost. The taxable part represents part of the earnings on your annuity contract. If your lump-sum credit (discussed later) includes a deemed deposit or redeposit, the taxable amount may be more than the lump-sum payment. You must include the taxable part of the lump-sum payment in your income for the year you receive the payment unless you roll it over into another qualified plan or a traditional IRA. If you do not have OPM transfer the taxable amount to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. See Rollover Rules, later, for information on how to make a rollover.
OPM can make a direct rollover only up to the amount of the lump-sum payment. Therefore, to defer tax on the full taxable amount if it is more than the payment, you must roll over the difference using your own funds.
The taxable part of the lump-sum payment does not qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. It also may be subject to an additional 10% tax on early distributions if you separate from service before the calendar year in which you reach age 55. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.
Worksheet B. Use Worksheet B, Worksheet for Lump-Sum Payment (near the end of this publication), to figure the taxable part of your lump-sum payment. Be sure to keep the completed worksheet for your records.
To complete the worksheet, you will need to know the amount of your lump-sum credit and the present value of your annuity contract.
Lump-sum credit. Generally, this is the same amount as the lump-sum payment you receive (the total of your contributions to the retirement system and interest on those contributions). However, for purposes of the alternative annuity option, your lump-sum credit also may include deemed deposits and redeposits that OPM advanced to your retirement account so that you are given credit for the service they represent. Deemed deposits (including interest) are for federal employment during which no retirement contributions were taken out of your pay. Deemed redeposits (including interest) are for any refunds of retirement contributions that you received and did not repay. You are treated as if you had received a lump-sum payment equal to the amount of your lump-sum credit and then had made a repayment to OPM of the advanced amounts.
Present value of your annuity contract. The present value of your annuity contract is figured using actuarial tables provided by the IRS.
To find out the present value of your annuity contract, call the IRS Actuarial Projects Group at 202-283-9717 (not a toll-free call).
Example. David Brown retired from the federal government in 2002, one month after his 55th birthday. He had contributed $31,000 to his retirement plan and chose to receive a lump-sum payment of that amount under the alternative annuity option. The present value of his annuity contract was $155,000. Using Worksheet B, he figures the taxable part of the lump-sum payment and his net cost in the plan. That worksheet is shown below.
Filled-In Worksheet B. Lump-Sum Payment for David Brown Keep for Your Records See the instructions in Part II of this publication under Alternative Annuity Option.
| 1. |
Enter your lump-sum credit (your cost in the plan at the annuity starting date) |
1. |
$ 31,000 |
| 2. |
Enter the present value of your annuity contract |
2. |
155,000 |
| 3. |
Divide line 1 by line 2 |
3. |
.20 |
| 4. |
Tax-free amount. Multiply line 1 by line 3. (Caution: Do not include this amount on line 6 of Worksheet A in this publication.) |
4. |
$ 6,200 |
| 5. |
Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on line 16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet A in this publication. |
5. |
$ 24,800 |
Example. David Brown - Filled-in Worksheet B - Lump-Sum Payment
Filled-In Worksheet B. Lump-Sum Payment for David Brown Keep for Your Records See the instructions in Part II of this publication under Alternative Annuity Option.
| 1. |
Enter your lump-sum credit (your cost in the plan at the annuity starting date) |
1. |
$ 31,000 |
| 2. |
Enter the present value of your annuity contract |
2. |
155,000 |
| 3. |
Divide line 1 by line 2 |
3. |
.20 |
| 4. |
Tax-free amount. Multiply line 1 by line 3. (Caution: Do not include this amount on line 6 of Worksheet A in this publication.) |
4. |
$ 6,200 |
| 5. |
Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on line 16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet A in this publication. |
5. |
$ 24,800 |
Lump-sum payment in installments. If you choose the alternative annuity option, you usually will receive the lump-sum payment in two equal installments. You will receive the first installment after you make the choice upon retirement. The second installment will be paid to you, with interest, in the next calendar year. (Exceptions to the installment rule are provided for cases of critical medical need.)
Even though the lump-sum payment is made in installments, the overall tax treatment (explained at the beginning of this discussion) is the same as if the whole payment were paid at once. If the payment has a tax-free part, you must treat the taxable part as received first.
How to report. Add any actual or deemed payment of your lump-sum credit (defined earlier) to the total for line 16a, Form 1040, or line 12a, Form 1040A. Add the taxable part to the total for line 16b, Form 1040, or line 12b, Form 1040A, unless you roll over the taxable part to a traditional IRA or a qualified retirement plan.
If you receive the lump-sum payment in two installments, include any interest paid with the second installment on line 8a of either Form 1040 or Form 1040A.
Reduced Annuity
If you have chosen to receive a lump-sum payment under the alternative annuity option, you also will receive reduced monthly annuity payments. These annuity payments each will have a tax-free and a taxable part. To figure the tax-free part of each annuity payment, you must use the Simplified Method (Worksheet A). For instructions on how to complete the worksheet, see Worksheet A under Simplified Method, earlier.
To complete line 2 of Worksheet A, you must reduce your cost in the plan by the tax-free part of the lump-sum payment you received. Enter as your net cost on line 2 the amount from line 5 of Worksheet B. Do not include the tax-free part of the lump-sum payment with other amounts recovered tax free (line 6 of Worksheet A) when limiting your total exclusion to your total cost.
Example. The facts are the same as in the example for David Brown in the preceding discussion. In addition, David received 10 annuity payments in 2002 of $1,200 each. Using Worksheet A, he figures the taxable part of his annuity payments. He completes line 2 by reducing his $31,000 cost by the $6,200 tax-free part of his lump-sum payment. His entry on line 2 is his $24,800 net cost in the plan (the amount from line 5 of Worksheet B). He does not include the tax-free part of his lump-sum payment on line 6 of Worksheet A. David's filled-in Worksheet A is shown on the next page.
Filled-In Worksheet A. Simplified Method for David Brown Keep for Your Records See the instructions in Part II of this publication under Simplified Method.
| 1. |
Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a |
|
|
|
1. |
$ 12,000 |
| 2. |
Enter your cost in the plan at the annuity starting date plus any death benefit exclusion * |
|
|
|
2. |
24,800 |
| |
Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3. |
|
|
|
|
|
| 3. |
Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 |
|
|
|
3. |
360 |
| 4. |
Divide line 2 by line 3 |
|
|
|
4. |
68.89 |
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 |
|
|
|
5. |
688.90 |
| 6. |
Enter any amounts previously recovered tax free in years after 1986 |
|
|
|
6. |
0 |
| 7. |
Subtract line 6 from line 2 |
|
|
|
7. |
24,800 |
| 8. |
Enter the smaller of line 5 or line 7 |
|
|
|
8. |
688.90 |
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead |
|
|
|
9. |
$ 11,311.10 |
| 10. |
Add lines 6 and 8 |
|
|
|
10. |
688.90 |
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2 |
|
|
|
11. |
$ 24,111.10 |
| Table 1 for Line 3 Above |
| | IF the age at annuity starting date was |
| AND your annuity starting date was - |
| |
|
before November 19, 1996, enter on line 3 | after November 18, 1996, enter on line 3 |
| | 55 or under |
300 | 360 |
| | 56-60 |
260 | 310 |
| | 61-65 |
240 | 260 |
| | 66-70 |
170 | 210 |
| | 71 or over |
120 | 160 |
| Table 2 for Line 3 Above |
| |
IF the combined ages at annuity starting date were |
|
THEN enter on line 3 |
|
|
|
| |
110 or under |
|
410 |
|
|
|
| |
111-120 |
|
360 |
|
|
|
| |
121-130 |
|
310 |
|
|
|
| |
131-140 |
|
260 |
|
|
|
| |
141 or over |
|
210 |
|
|
|
| *A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. |
Example. David Brown - Filled-in Worksheet A - Simplified Method
Filled-In Worksheet A. Simplified Method for David Brown Keep for Your Records See the instructions in Part II of this publication under Simplified Method.
| 1. |
Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a |
|
|
|
1. |
$ 12,000 |
| 2. |
Enter your cost in the plan at the annuity starting date plus any death benefit exclusion * |
|
|
|
2. |
24,800 |
| |
Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3. |
|
|
|
|
|
| 3. |
Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1 |
|
|
|
3. |
360 |
| 4. |
Divide line 2 by line 3 |
|
|
|
4. |
68.89 |
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6 |
|
|
|
5. |
688.90 |
| 6. |
Enter any amounts previously recovered tax free in years after 1986 |
|
|
|
6. |
0 |
| 7. |
Subtract line 6 from line 2 |
|
|
|
7. |
24,800 |
| 8. |
Enter the smaller of line 5 or line 7 |
|
|
|
8. |
688.90 |
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead |
|
|
|
9. |
$ 11,311.10 |
| 10. |
Add lines 6 and 8 |
|
|
|
10. |
688.90 |
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2 |
|
|
|
11. |
$ 24,111.10 |
| Table 1 for Line 3 Above |
| | IF the age at annuity starting date was |
| AND your annuity starting date was - |
| |
|
before November 19, 1996, enter on line 3 | after November 18, 1996, enter on line 3 |
| | 55 or under |
300 | 360 |
| | 56-60 |
260 | 310 |
| | 61-65 |
240 | 260 |
| | 66-70 |
170 | 210 |
| | 71 or over |
120 | 160 |
| Table 2 for Line 3 Above |
| |
IF the combined ages at annuity starting date were |
|
THEN enter on line 3 |
|
|
|
| |
110 or under |
|
410 |
|
|
|
| |
111-120 |
|
360 |
|
|
|
| |
121-130 |
|
310 |
|
|
|
| |
131-140 |
|
260 |
|
|
|
| |
141 or over |
|
210 |
|
|
|
| *A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. |
Reemployment after choosing the alternative annuity option. If you chose this option when you retired and then you were reemployed by the federal government before retiring again, your Form CSA 1099R may show only the amount of your contributions to your retirement plan during your reemployment. If the amount on the form does not include all your contributions, disregard it and use your total contributions to figure the taxable part of your annuity payments.
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