Tax Guide to   U.S. Civil   Service   Retirement   Benefits

Taxmap/pubs/p721-000.htm#TXMP2f584229 What's New

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Catch-up contributions to Thrift Savings Plan (TSP).

Participants in the TSP who are age 50 or over at the end of the year generally can make catch-up contributions to the plan. For 2004, the maximum catch-up contribution is increased from $2,000 to $3,000. For 2005, the maximum is increased to $4,000.

Taxmap/pubs/p721-000.htm#TXMP078adca7 Reminders

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Rollovers.

You can roll over certain amounts from the Civil Service Retirement System (CSRS), the Federal Employees' Retirement System (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.

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Rollover by surviving spouse.

You may be able to roll over a distribution 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.

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Benefits for public safety officer's survivors.

A survivor annuity received in 2004 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. Survivor benefits received before 2002 were excludable only if the officer died after 1996. For more information, see Dependents of public safety officers in Part IV.

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Uniformed services Thrift Savings Plan (TSP) accounts.

If you have a uniformed services TSP account, it may include contributions from combat zone pay. This pay is tax-exempt and contributions attributable to that pay are tax-exempt when they are distributed from the uniformed services TSP account. However, any earnings on those contributions are subject to tax when they are distributed. The statement you receive from the TSP will state the total amount of your distribution and the amount of your taxable distribution for the year. If you have both a civilian and a uniformed services TSP account, you should apply the rules discussed in this publication separately to each account. You can get more information from the TSP website, www.tsp.gov, or the TSP Service Office.

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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).

Taxmap/pubs/p721-000.htm#TXMP107c9941 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.

Taxmap/pubs/p721-000.htm#TXMP3ab7f78f 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.

Taxmap/pubs/p721-000.htm#TXMP51236875 Comments and suggestions.

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Internal Revenue Service  
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Taxmap/pubs/p721-000.htm#TXMP75ba833d Tax questions.

If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

Taxmap/pubs/p721-000.htm#TXMP0c15e625 Ordering forms and publications.

Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the three addresses shown under How To Get Tax Help in the back of this publication.

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Taxmap/pubs/p721-000.htm#TXMP658fc0d5 Part I   General Information

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

Taxmap/pubs/p721-000.htm#TXMP7d6f4763 Refund of Contributions

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.

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.

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.

A lump-sum distribution is eligible for capital gain treatment or the 10-year tax option only if the plan participant was born before January 2, 1936.

Taxmap/pubs/p721-000.htm#TXMP4c54ad18 Tax Withholding   and Estimated Tax

Tax Withholding and Estimated Tax

The CSRS or FERS annuity you receive is subject to federal income tax withholding, 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.

Taxmap/pubs/p721-000.htm#TXMP799d4b5a 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.

Taxmap/pubs/p721-000.htm#TXMP128a3866 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.

Taxmap/pubs/p721-000.htm#TXMP69cbff36 Withholding certificate.

If you give OPM a Form W-4P-A, Election of Federal Income Tax Withholding, you can choose not to have tax withheld or you can choose to have tax withheld depending on your marital status and withholding allowances. If you do not make either of these choices, 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), your social security number, and your personal identification number (PIN) when you call. If you have TTY/TDD equipment, call 1-800-878-5707. If you need a PIN, call OPM's Retirement Information Office.

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 PIN.

Taxmap/pubs/p721-000.htm#TXMP70567222 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 if you have OPM transfer (roll over) the interest directly to your traditional IRA or other qualified plan. See Rollover Rules in Part II. If you receive only your contributions, no tax will be withheld.

Taxmap/pubs/p721-000.htm#TXMP5ead5d54 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 "Publications," then "Tax Notices."

Taxmap/pubs/p721-000.htm#TXMP4c884434 Estimated tax.

Generally, you should make estimated tax payments for 2005 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:

• 90% of the tax to be shown on your income tax return for 2005, or
• The tax shown on your 2004 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 2005 will be married filing separately)). The return must cover all 12 months.

You do not have to pay estimated tax for 2005 if you were a U.S. citizen or resident for all of 2004 and you had no tax liability for the full 12-month 2004 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.

Taxmap/pubs/p721-000.htm#TXMP50747b42 Filing Requirements

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 for that year. The gross income filing requirements for the tax year are in the instructions to the Form 1040, 1040A, or 1040EZ.

Taxmap/pubs/p721-000.htm#TXMP4fd94a14 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.

Taxmap/pubs/p721-000.htm#TXMP73584241 Form CSF 1099R.

Form CSF 1099R will be mailed to you by January 31 after the end of each tax year. It 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.

Taxmap/pubs/p721-000.htm#TXMP62642bc4 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.

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