Important Changes

Rollovers.   For distributions made after 2001, you can roll over certain amounts from the CSRS, the FERS, or the TSP, to a tax-sheltered annuity plan (403(b) plan) or a state or local government section 457 deferred compensation plan. See Rollover Rules in Part II.

Time for making rollover.   The 60-day period for completing the rollover of an eligible distribution may be extended for distributions made after 2001 in certain cases of casualty, disaster, or other events beyond your reasonable control. See Rollover Rules in Part II.

Rollover by surviving spouse.   You may be able to roll over a distribution made after 2001 you receive as the surviving spouse of a deceased employee into a qualified retirement plan or a traditional IRA. See Rollover Rules in Part II.

Benefits for public safety officer's survivors.   For tax years beginning after 2001, a survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty generally will be excluded from the recipient's income regardless of the date of the officer's death. Survivor benefits received before 2002 were excludable only if the officer died after 1996. The provision applies to a chaplain killed in the line of duty after September 10, 2001. For more information, see Dependents of public safety officers in Part IV.

Important Reminder

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication explains how the federal income tax rules apply to civil service retirement benefits received by retired federal employees (including those disabled) or their survivors. These benefits are paid primarily under the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS).

Tax rules for annuity benefits.   Part of the annuity benefits you receive is a tax-free recovery of your contributions to the CSRS or FERS. The rest of your benefits are taxable. If your annuity starting date is after November 18, 1996, you must use the Simplified Method to figure the taxable and tax-free parts. If your annuity starting date is before November 19, 1996, you generally could have chosen to use the Simplified Method or the General Rule. See Part II, Rules for Retirees.

Thrift Savings Plan.   The Thrift Savings Plan (TSP) provides federal employees with the same savings and tax benefits that many private employers offer their employees. This plan is similar to private sector 401(k) plans. You can defer tax on part of your pay by having it contributed to your account in the plan. The contributions and earnings on them are not taxed until they are distributed to you. See Thrift Savings Plan in Part II.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 524   Credit for the Elderly or the Disabled
• 575   Pension and Annuity Income
• 590   Individual Retirement Arrangements (IRAs)
• 939   General Rule for Pensions and Annuities

Form (and Instructions)

• CSA 1099R   Statement of Annuity Paid
• CSF 1099R   Statement of Survivor Annuity Paid
• 1099-R   Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
• 5329   Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts

See How To Get Tax Help near the end of this publication for information about getting publications and forms.

Part I General Information

This part of the publication contains information that can apply to most recipients of civil service retirement benefits.

Refund of Contributions

If you leave federal government service or transfer to a job not under the CSRS or FERS and you are not eligible for an immediate annuity, you can choose to receive a refund of the money in your CSRS or FERS retirement account. The refund will include both regular and voluntary contributions you made to the fund, plus any interest payable.

If the refund includes only your contributions, none of the refund is taxable. If it includes any interest, the interest is taxable unless you roll it over into another qualified plan or a traditional individual retirement arrangement (IRA). If you do not have the Office of Personnel Management (OPM) transfer the interest to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. See Rollover Rules in Part II for information on how to make a rollover.

If you do not roll over interest included in your refund, it may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. If you separate from service before the calendar year in which you reach age 55, it may be subject to an additional 10% tax on early distributions. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.

Interest is not paid on contributions to the CSRS for service after 1956 unless your service was for more than 1 year but not more than 5 years. Therefore, many employees who withdraw their contributions under the CSRS do not get interest and do not owe any tax on their refund.

Tax Withholding and Estimated Tax

The CSRS or FERS annuity you receive is subject to federal income tax withholding based on tables prepared by the Internal Revenue Service, unless you choose not to have tax withheld. OPM will tell you how to make the choice. The choice for no withholding remains in effect until you change it. These withholding rules also apply to a disability annuity, whether received before or after minimum retirement age.

If you choose not to have tax withheld, or if you do not have enough tax withheld, you may have to make estimated tax payments.

You may owe a penalty if the total of your withheld tax and estimated tax does not cover most of the tax shown on your return. Generally, you will owe the penalty if the additional tax you must pay with your return is $1,000 or more and more than 10% of the tax shown on your return. For more information, including exceptions to the penalty, see chapter 4 of Publication 505, Tax Withholding and Estimated Tax.

Form CSA 1099R.   Form CSA 1099R is mailed to you by OPM each year. It will show any tax you had withheld. File a copy of Form CSA 1099R with your tax return if any federal income tax was withheld.

Choosing no withholding on payments outside the United States.   The choice for no withholding generally cannot be made for annuity payments to be delivered outside the United States and its possessions.

To choose no withholding if you are a U.S. citizen or resident, you must provide OPM with your home address in the United States or its possessions. Otherwise, OPM has to withhold tax. For example, OPM must withhold if you provide a U.S. address for a nominee, trustee, or agent (such as a bank) to whom the benefits are to be delivered, but you do not provide your own U.S. home address.

If you certify to OPM that you are not a U.S. citizen, a U.S. resident alien, or someone who left the United States to avoid tax, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. For details, see Publication 519, U.S.Tax Guide for Aliens.

Withholding certificate.   If you give OPM a Form W-4P-A, Election of Federal Income Tax Withholding, choosing withholding, your annuity will be treated like wages for income tax withholding purposes. If you do not make a choice, OPM must withhold as if you were married with three withholding allowances.

To change the amount of tax withholding or to stop withholding, call OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D.C. calling area must call 202-606-0500), or call Annuitant Express at 1-800-409-6528. No special form is needed. You will need your retirement claim number (CSA or CSF) and your social security number when you call. If you have TTY/TDD equipment, call 1-800-878-5707.

You also can change the amount of withholding or stop withholding through the Internet at www.servicesonline.opm.gov. You will need your retirement claim number (CSA or CSF) and your Personal Identification Number (PIN). To get a PIN, call the OPM's Retirement Information Office. (See the preceding paragraph for telephone numbers.)

Withholding from certain lump-sum payments.   If you leave the federal government before becoming eligible to retire and you apply for a refund of your CSRS or FERS contributions, or you die without leaving a survivor eligible for an annuity, you or your beneficiary will receive a distribution of your contributions to the retirement plan plus any interest payable. Tax will be withheld at a 20% rate on the interest distributed. However, tax will not be withheld on the interest if you roll it over to a traditional IRA or a qualified plan by having OPM transfer it directly to the traditional IRA or other plan. See Rollover Rules in Part II. If you receive only your contributions, no tax will be withheld.

If you retire and elect to receive a reduced annuity and a lump-sum payment under the alternative annuity option, tax will be withheld at a 20% rate on the taxable part of the lump-sum payment received. (See Alternative Annuity Option in Part II for information about this option.) However, no tax will be withheld from the lump sum if you roll the taxable part over to a traditional IRA or a qualified plan by having OPM transfer the taxable part directly to a traditional IRA or other plan.

Withholding from Thrift Savings Plan payments.   Generally, a distribution that you receive from the Thrift Savings Plan (TSP) is subject to federal income tax withholding. The amount withheld is:

• 20% if the distribution is an eligible rollover distribution, or
• 10% if it is a nonperiodic distribution other than an eligible rollover distribution, or
• An amount determined by treating the payment as wages, if it is a periodic distribution.

However, you usually can choose not to have tax withheld from TSP payments other than eligible rollover distributions. By January 31 after the end of the year in which you receive a distribution, the TSP will issue Form 1099-R showing the total distributions you received in the prior year and the amount of tax withheld.

For a detailed discussion of withholding on distributions from the TSP, see Important Tax Information About Payments From Your TSP Account, available from your agency personnel office or from the TSP.

The above document is also available on the Internet at www.tsp.gov. Select Forms & Publications, then select Other Documents.

Estimated tax.   Generally, you should make estimated tax payments for 2003 if you expect to owe at least $1,000 in tax (after subtracting your withholding and credits) and you expect your withholding and your credits to be less than the smaller of:

1. 90% of the tax to be shown on your income tax return for 2003, or
2. The tax shown on your 2002 income tax return (110% of that amount if the adjusted gross income shown on the return was more than $150,000 ($75,000 if your filing status for 2003 will be married filing separately)). The return must cover all 12 months.

You do not have to pay estimated tax for 2003 if you were a U.S. citizen or resident for all of 2002 and you had no tax liability for the full 12-month 2002 tax year.

Form 1040-ES contains a worksheet that you can use to see if you should make estimated tax payments. For more information, see chapter 2 in Publication 505.

Filing Requirements

If your gross income, including the taxable part of your annuity, is less than a certain amount, you generally do not have to file a federal income tax return. The gross income filing requirements are in the instructions to the Form 1040, 1040A, or 1040EZ, that you get each year. You should check these requirements closely because they change occasionally.

Children.   If you are the surviving spouse of a federal employee or retiree and your monthly annuity check includes a survivor annuity for one or more children, each child's annuity counts as his or her own income (not yours) for federal income tax purposes.

If your child can be claimed as a dependent, treat his or her annuity as unearned income to apply the filing requirements.

Form CSF 1099R.   By January 31 after the end of each tax year, you should receive Form CSF 1099R, which will show the total amount of the annuity you received in the past year. It also should show, separately, the survivor annuity for a child or children. Only the part that is each individual's survivor annuity should be shown on that individual's Form 1040 or 1040A.

If your Form CSF 1099R does not show separately the amount paid to you for a child or children, attach a statement to your return, along with a copy of Form CSF 1099R, explaining why the amount shown on the tax return differs from the amount shown on Form CSF 1099R.

You may request a Summary of Payments, showing the amounts paid to you for your child(ren), from OPM by calling OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D.C. calling area must call 202-606-0500). You will need your CSF claim number and your social security number when you call.

Taxable part of annuity.   To find the taxable part of each annuity, see the discussion in Part IV, Rules for Survivors of Federal Employees, or Part V, Rules for Survivors of Federal Retirees, whichever applies.

Part II Rules for Retirees

This part of the publication is for retirees who retired on nondisability retirement. If you retired on disability, see Part III, Rules for Disability Retirement and Credit for the Elderly or the Disabled, later.

Annuity statement.   The statement you received from OPM when your CSRS or FERS annuity was approved shows the commencing date (the annuity starting date), the gross monthly rate of your annuity benefit, and your total contributions to the retirement plan (your cost). You will use this information to figure the tax-free recovery of your cost.

Annuity starting date.   If you retire from federal government service on a regular annuity, your annuity starting date is the commencing date on your annuity statement from OPM. If something delays payment of your annuity, such as a late application for retirement, it does not affect the date your annuity begins to accrue or your annuity starting date.

Gross monthly rate.   This is the amount you were to get after any adjustment for electing a survivor's annuity or for electing the lump-sum payment under the alternative annuity option (if either applied) but before any deduction for income tax withholding, insurance premiums, etc.

Your cost.   Your monthly annuity payment contains an amount on which you have previously paid income tax. This amount represents part of your contributions to the retirement plan. Even though you did not receive the money that was contributed to the plan, it was included in your gross income for federal income tax purposes in the years it was taken out of your pay.

The cost of your annuity is the total of your contributions to the retirement plan, as shown on your annuity statement from OPM. If you elected the alternative annuity option, it includes any deemed deposits and any deemed redeposits that were added to your lump-sum credit. (See Lump-sum credit under Alternative Annuity Option, later.)

If you repaid contributions that you had withdrawn from the retirement plan earlier, or if you paid into the plan to receive full credit for service not subject to retirement deductions, the entire repayment, including any interest, is a part of your cost. You cannot claim an interest deduction for any interest payments. You cannot treat these payments as voluntary contributions; they are considered regular employee contributions.

Recovering your cost tax free.   How you figure the tax-free recovery of the cost of your CSRS or FERS annuity depends on your annuity starting date.

• If your annuity starting date is before July 2, 1986, either the Three-Year Rule or the General Rule (both discussed later) applies to your annuity.
• If your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method.
• If your annuity starting date is after November 18, 1996, you must use the Simplified Method.

Under both the General Rule and the Simplified Method, each of your monthly annuity payments is made up of two parts: the tax-free part that is a return of your 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 is a fixed dollar amount. It remains the same, even if your annuity is increased. Generally, this rule applies as long as you receive your annuity. However, see Exclusion limit, later.

Choosing a survivor annuity after retirement.   If you retired without a survivor annuity and report your annuity under the Simplified Method, do not change your tax-free monthly amount even if you later choose a survivor annuity.

If you retired without a survivor annuity and report your annuity under the General Rule, you must figure a new exclusion percentage if you later choose a survivor annuity. To figure it, reduce your cost by the amount you previously recovered tax free. Figure the expected return as of the date the reduced annuity begins. For details on the General Rule, see Publication 939.

Canceling a survivor annuity after retirement.   If you notify OPM that your marriage has ended, your annuity might be increased to remove the reduction for a survivor benefit. The increased annuity does not change the cost recovery you figured at the annuity starting date. The tax-free part of each annuity payment remains the same.

For more information about choosing or canceling a survivor annuity after retirement, contact OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D.C. calling area must call 202-606-0500).

Exclusion limit.   If your annuity starting date is after 1986, the total amount of annuity income that you (or the survivor annuitant) can exclude over the years as a return of your cost may not exceed your total cost. Annuity payments you or your survivors receive after the total cost in the plan has been recovered are fully taxable.

Example.   Your annuity starting date is after 1986 and 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.

Annuity starting date before 1987.   If your annuity starting date is before 1987, you continue to take your monthly exclusion figured under the General Rule or Simplified Method for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor continues to take that same exclusion. The total exclusion may be more than your cost.

Deduction of unrecovered cost.   If your annuity starting date is after July 1, 1986, and the cost of your annuity has not been fully recovered at your (or the survivor annuitant's) death, a deduction is allowed for the unrecovered cost. The deduction is claimed on your (or your survivor's) final tax return as a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income limit). If your annuity starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost at death.

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