A recent column has shed light on the federal taxation of Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) non-disability retirement annuities. It provides valuable insights into how these annuities are taxed, specifically under the IRS Simplified Rule, highlighting both the taxable and non-taxable portions of monthly annuity payments.
The column also delves into the intricacies of taxation concerning survivor annuity benefits available under CSRS and FERS. It outlines two primary scenarios that affect the taxation of survivor annuities. The first scenario involves a retired employee who passes away before fully receiving their contributions from the CSRS or FERS Retirement and Disability Funds. The second scenario addresses the case of an employee who dies in service prior to beginning their annuity payments.
Moreover, the column provides essential details on the children’s survivor benefits. These benefits are accessible to the eligible children of deceased employees or retirees, with eligible candidates including unmarried children under 18 and those between 18 and 22 who are full-time college students. Children disabled prior to turning 18 continue to qualify for these benefits indefinitely unless they marry, unlike survivor annuities where the retiree elects to provide benefits to a spouse, resulting in an annuity reduction.
In the first scenario discussed, if a retired employee dies before fully receiving all annuity contributions, the tax-free portion remains unchanged, even with annual cost-of-living adjustments (COLAs). For instance, the column presents a case in which Jeff, a CSRS retiree, dies less than a year after retirement, leaving behind a survivor annuity for his wife, Francine. The tax-free portion of Jeff’s contributions continues to apply to Francine’s survivor annuity until all contributions have been reimbursed.
On the other hand, if an employee dies while in service, the survivor annuity begins the month following the employee’s death. Here, the tax-free component is similarly based on the total contributions made during the employee’s time in federal service.
Furthermore, the article elaborates on how to calculate the tax-free portion of survivor annuities for both scenarios. For example, a survivor annuitant can utilize the Simplified Method, dividing total contributions by their single life expectancy at the time of the employee’s death for accurate predictions of taxable income.
Intricacies are further explored for instances involving both a surviving spouse and children. In these cases, an additional calculation is needed to allocate the monthly exclusion accurately among the beneficiaries. The column clarifies these allocations with examples illustrating how to determine individual tax-free portions for both the spouse and the children receiving benefits.
Finally, the column points readers towards IRS Publication 721 for further guidance on the taxation of CSRS and FERS annuities and survivor benefits, providing a reliable resource for those navigating these financial waters. Overall, this comprehensive overview serves as a crucial tool in understanding the tax implications associated with CSRS and FERS retirement and survivor annuities.
