This part of the publication is for survivors of federal employees. It explains how to treat amounts you receive because of the employee's death. If you are the survivor of a federal retiree, see Part V.taxmap/pubs/p721-003.htm#en_us_publink100029001
Salary or wages earned by a federal employee but paid to the employee's survivor or beneficiary after the employee's death are income in respect of the decedent. This income is taxable to the survivor or beneficiary. This treatment also applies to payments for accrued annual leave. taxmap/pubs/p721-003.htm#en_us_publink100029002
The Public Safety Officers' Benefits program, administered through the Bureau of Justice Assistance (BJA), provides a tax-free death benefit to eligible survivors of public safety officers whose death is the direct and proximate result of a traumatic injury sustained in the line of duty. The death benefit is not includible in the decedent's gross estate for federal estate tax purposes or the survivor's gross income for federal income tax purposes.
A public safety officer is a law enforcement officer, firefighter, or member of a public rescue squad or ambulance crew. In certain circumstances, a chaplain killed in the line of duty is also a public safety officer. The chaplain must have been responding to a fire, rescue, or police emergency as a member or employee of a fire or police department.
This program can pay survivors an emergency interim benefit of up to $3,000 if it finds that the death of the public safety officer is one for which a final benefit will probably be paid. If there is no final payment, the recipient of the interim benefit is liable for repayment. However, the BJA may not require all or part of the repayment if it will cause a hardship. If that happens, that amount is tax free.
For more information on this program, you may contact the BJA by calling 1-888-744-6513, or 202-307-0635 if you are in the metropolitan Washington, D.C., calling area.
You may be entitled to a special FERS death benefit if you were the spouse of an active FERS employee who died after at least 18 months of federal service. At your option, you can take the benefit in the form of a single payment or in the form of a special annuity payable over a 3-year period.
The tax treatment of the special death benefit depends on the option you choose and whether a FERS survivor annuity is also paid.
If you choose the single payment option, use the following rules.
- If a FERS survivor annuity is not paid, at least part of the special death benefit is tax free. The tax-free part is an amount equal to the employee's FERS contributions.
- If a FERS survivor annuity is also paid, all of the special death benefit is taxable. You cannot allocate any of the employee's FERS contributions to the special death benefit.
If you choose the 3-year annuity option, at least part of each monthly payment is tax free. Use the following rules.
- If a FERS survivor annuity is not paid, the tax-free part of each monthly payment is an amount equal to the employee's FERS contributions divided by 36.
- If a FERS survivor annuity is also paid, allocate the employee's FERS contributions between the 3-year annuity and the survivor annuity. Make the allocation in the same proportion that the expected return from each annuity bears to the total expected return from both annuities. Divide the amount allocated to the 3-year annuity by 36. The result is the tax-free part of each monthly payment of the 3-year annuity.
If you receive a CSRS or FERS survivor annuity, you can recover the employee's cost tax free. The employee's cost is the total of the retirement plan contributions that were taken out of his or her pay.
How you figure the tax-free recovery of the cost depends on your annuity starting date. This is the day after the date of the employee's death. The methods to use are the same as those described near the beginning of Part II under Recovering your cost tax free.
The following discussions cover only the Simplified Method. You can use this method if your annuity starting date is after July 1, 1986. You must use this method if your annuity starting date is after November 18, 1996. Under the Simplified Method, each of your monthly annuity payments is made up of two parts: the tax-free part that is a return of the employee's cost and the taxable part that is the amount of each payment that is more than the part that represents the employee's cost. The tax-free part remains the same, even if your annuity is increased. However, see Exclusion limit, later. taxmap/pubs/p721-003.htm#en_us_publink100029007
Under the Simplified Method, you figure the tax-free part of each full monthly annuity payment by dividing the employee's cost by a number of months based on your age. This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. To use the Simplified Method, complete Worksheet A. Specific instructions for Worksheet A are given in Part II under Simplified Method. taxmap/pubs/p721-003.htm#en_us_publink100029008
Diane Green, age 48, began receiving a $1,500 monthly CSRS annuity in March 2008 upon the death of her husband. Her husband was a federal employee when he died. She received 10 payments in 2008. Her husband had contributed $36,000 to the retirement plan.
Diane must use the Simplified Method. Her completed Worksheet A is shown on the next page. To complete line 3, she used Table 1 at the bottom of the worksheet and found that 360 is the number in the last column opposite the age range that includes her age. Diane keeps a copy of the completed worksheet for her records. It will help her figure her taxable annuity in later years.
See the instructions in Part II of this publication under Simplified Method.
Worksheet A. Simplified Method for Diane Green
* A death benefit exclusion of up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996.
|1.||Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a ||1.||$ 15,000|
|2.||Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion*. See Your cost in Part II, Rules for Retirees, earlier ||2.||36,000|
|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 (even if the amount of your pension or annuity has changed). Otherwise, go to line 3.|| |
|3.||Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below. ||3.||360|
|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, skip lines 6 and 7 and enter this amount on line 8. Otherwise, go to line 6 ||5.||1,000|
|6.||Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year ||6.||0|
|7.||Subtract line 6 from line 2||7.||36,000|
|8.||Enter the smaller of line 5 or line 7 ||8.||1,000|
|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 you are a nonresident alien, also enter this amount on line 1 of Worksheet C. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount figured on this line instead. If your are a retired public safety officer, see Distributions Used To Pay Insurance Premiums for Public Safety Officers in Part II before entering an amount on your tax return or Worksheet C, line 1 ||9.||$ 14,000|
|10.||Was your annuity starting date before 1987? |
Yes. Do not complete the rest of this worksheet.
No. Add lines 6 and 8. This is the amount you have recovered tax free through 2008. You will need this number if you need to fill out this worksheet next year
|11.||Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable ||11.||$ 35,000|
|Table 1 for Line 3 Above|
| ||IF your age on your|
annuity starting date was
| ||AND your annuity starting date was—|
| || ||before November 19, 1996, |
THEN enter on line 3
|after November 18, 1996, |
THEN enter on line 3
| ||55 or under||300||360|
| ||71 or over||120||160|
Table 2 for Line 3 Above
| ||IF the annuitants' combined ages on your 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|| || || |
Diane's tax-free monthly amount is $100 (line 4 of her worksheet). If she lives to collect more than 360 payments, the payments after the 360th will be fully taxable. If she dies before 360 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. taxmap/pubs/p721-003.htm#en_us_publink100029009
If the survivor benefits include both a life annuity for the surviving spouse and one or more temporary annuities for the employee's children, an additional step is needed under the Simplified Method to allocate the monthly exclusion among the beneficiaries correctly.
Figure the total monthly exclusion for all beneficiaries by completing lines 2 through 4 of Worksheet A as if only the surviving spouse received an annuity. Then, to figure the monthly exclusion for each beneficiary, multiply line 4 of the worksheet by a fraction. For any beneficiary, the numerator of the fraction is that beneficiary's monthly annuity and the denominator is the total of the monthly annuity payments to all the beneficiaries.
The ending of a child's temporary annuity does not affect the total monthly exclusion figured under the Simplified Method. The total exclusion merely needs to be reallocated at that time among the remaining beneficiaries. If only the surviving spouse is left drawing an annuity, the surviving spouse is entitled to the entire monthly exclusion as figured in the worksheet.taxmap/pubs/p721-003.htm#en_us_publink100029010
The facts are the same as in the example for Diane Green in the preceding discussion except that the Greens had a son, Robert, who was age 15 at the time of his father's death. Robert is entitled to a $500 per month temporary annuity until he reaches age 18 (age 22, if he remains a full-time student and does not marry).
In completing Worksheet A (not shown), Diane fills out the entries through line 4 exactly as shown in the filled-in worksheet for the earlier example. That is, she includes on line 1 only the amount of the annuity she herself received and she uses on line 3 the 360 factor for her age. After arriving at the $100 monthly exclusion on line 4, however, Diane allocates it between her own annuity and that of her son.
To find how much of the monthly exclusion to allocate to her own annuity, Diane multiplies the $100 monthly exclusion by the fraction $1,500 (her monthly annuity) over $2,000 (the total of her $1,500 and Robert's $500 annuities). She enters the result, $75, just below the entry space for line 4. She completes the worksheet by entering $750 on lines 5 and 8 and $14,250 on line 9.
A second Worksheet A (not shown) is completed for Robert's annuity. On line 1, he enters $5,000 as the total annuity received. Lines 2, 3, and 4 are the same as those on his mother's worksheet. In allocating the $100 monthly exclusion on line 4 to his annuity, Robert multiplies it by the fraction $500 over $2,000. His resulting monthly exclusion is $25. His exclusion for the year (line 8) is $250 and his taxable annuity for the year (line 9) is $4,750.
Diane and Robert only need to complete lines 10 and 11 on a single worksheet to keep track of their unrecovered cost for next year. These lines are exactly as shown in the filled-in Worksheet A for the earlier example.
When Robert's temporary annuity ends, the computation of the total monthly exclusion will not change. The only difference will be that Diane will then claim the full exclusion against her annuity alone.taxmap/pubs/p721-003.htm#en_us_publink100029011
A method similar to the Simplified Method also can be used to figure the taxable and nontaxable parts of a temporary annuity for a surviving child when there is no surviving spouse annuity. To use this method, divide the deceased employee's cost by the number of months from the child's annuity starting date until the date the child will reach age 22. The result is the monthly exclusion. (However, the monthly exclusion cannot be more than the monthly annuity payment. You can carry over unused exclusion amounts to apply against future annuity payments.) taxmap/pubs/p721-003.htm#en_us_publink100029012
If there is more than one child entitled to a temporary annuity (and no surviving spouse annuity), divide the cost by the number of months of payments until the date the youngest child will reach age 22. This monthly exclusion must then be allocated among the children in proportion to their monthly annuity payments, like the exclusion shown in the previous example.taxmap/pubs/p721-003.htm#en_us_publink100029013
If a child otherwise entitled to a temporary annuity was permanently disabled at the annuity starting date (and there is no surviving spouse annuity), that child is treated for tax purposes as receiving a lifetime annuity, like a surviving spouse. The child must complete line 3 of Worksheet A using a number in Table 1 at the bottom of the worksheet corresponding to the child's age at the annuity starting date. If more than one child is entitled to a temporary annuity, an allocation like the one shown under Surviving spouse with child, earlier, must be made to determine each child's share of the exclusion.taxmap/pubs/p721-003.htm#en_us_publink100029014
If your annuity starting date is after 1986, the most that can be recovered tax free is the cost of the annuity. Once the total of your exclusions equals the cost, your entire annuity is taxable. If your annuity starting date is before 1987, the tax-free part of each whole monthly payment remains the same each year you receive payments—even if you outlive the number of months used on line 3 of the Simplified Method Worksheet. The total exclusion may be more than the cost of the annuity. taxmap/pubs/p721-003.htm#en_us_publink100029015
If the annuity starting date is after July 1, 1986, and the 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. taxmap/pubs/p721-003.htm#en_us_publink100029016
Generally, if you receive survivor annuity payments as the spouse, former spouse, or child of a public safety officer killed in the line of duty, you can exclude the payments from your income. The annuity is excludable to the extent that it is due to the officer's service as a public safety officer. Public safety officers include law enforcement officers, firefighters, chaplains, ambulance crew members, and rescue squad members. The provision applies to a chaplain killed in the line of duty after September 10, 2001. The chaplain must have been responding to a fire, rescue, or police emergency as a member or employee of a fire or police department.
The exclusion does not apply if your actions were a substantial contributing factor to the death of the officer. It also does not apply if:
- The death was caused by the intentional misconduct of the officer or by the officer's intention to cause his or her own death,
- The officer was voluntarily intoxicated at the time of death, or
- The officer was performing his or her duties in a grossly negligent manner at the time of death.
The special death benefit paid to the spouse of a FERS employee (see FERS Death Benefit, earlier) is not eligible for this exclusion.
If a federal employee dies before retiring and leaves no one eligible for a survivor annuity, the estate or other beneficiary will receive a lump-sum payment from the CSRS or FERS. This single payment is made up of the regular contributions to the retirement fund plus accrued interest, if any, to the extent not already paid to the employee.
The beneficiary is taxed, in the year the lump sum is distributed or made available, only on the amount of any accrued interest. 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. However, a nonspousal beneficiary making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, can roll over any taxable amount. In addition, the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. 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. taxmap/pubs/p721-003.htm#en_us_publink100029019
If an annuity is paid to the federal employee's survivor and the survivor annuity ends before an amount equal to the deceased employee'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 employee's estate or other beneficiary. Generally, this beneficiary will not have to include any of the lump sum in gross income because, when it is added to the amount of the annuity previously received that was excludable, it still will be less than the employee's total contributions.
Any unrecovered cost is allowed as a miscellaneous itemized deduction on the final return of the annuitant. This deduction is not subject to the 2%-of-adjusted- gross-income limit.
To figure the taxable amount, if any, use the following worksheet.
Worksheet D. Lump-Sum Payment
at End of Survivor Annuity
|1.||Enter the lump-sum payment||1.|| |
|2.||Enter the amount of annuity previously received tax free||2.|| |
|3.||Add lines 1 and 2||3.|| |
|4.||Enter the employee's total cost||4.|| |
|5.||Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero ||5.|| |
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. However, a nonspousal beneficiary making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, can roll over any taxable amount. In addition, the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. 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. taxmap/pubs/p721-003.htm#en_us_publink100029021
At the time of your brother's death in December 2007, he was employed by the Federal Government and had contributed $45,000 to the CSRS. His widow received $6,600 in survivor annuity payments before she died in 2008. She had used the Simplified Method for reporting her annuity and properly excluded $1,000 from gross income.
Only $6,600 of the guaranteed amount of $45,000 (your brother's contributions) was paid as an annuity, so the balance of $38,400 was paid to you in a lump sum as your brother's sole beneficiary. You figure the taxable amount of this payment as follows.
Worksheet D. Lump-Sum Payment
at End of Survivor Annuity — Example
|1.||Enter the lump-sum payment||1.||$ 38,400|
|2.||Enter the amount of annuity previously received tax free||2.||1,000|
|3.||Add lines 1 and 2||3.||39,400|
|4.||Enter the employee's total cost||4.||45,000|
|5.||Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero ||5.||0|
If a CSRS employee dies before retiring from government service, any voluntary contributions to the retirement fund cannot be used to provide an additional annuity to the survivors. Instead, the voluntary contributions plus any accrued interest will be paid in a lump sum to the estate or other beneficiary. The beneficiary generally must include any interest received in income for the year distributed or made available. However, if the beneficiary is the employee's surviving spouse (or someone other than the employee's spouse making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II), the interest can be rolled over. See also Rollovers by surviving spouse under Rollover Rules in Part II.
The interest, if not rolled over, generally is subject to federal income tax withholding at a 20% rate (or 10% rate if the beneficiary is not the employee's surviving spouse). It may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if:
- The plan participant was born before January 2, 1936,
- Regular annuity benefits cannot be paid under the retirement system, and
- The beneficiary also receives a lump-sum payment of the regular contributions plus interest within the same tax year as the voluntary contributions.
For more information, see Lump-Sum Distributions in Publication 575. taxmap/pubs/p721-003.htm#en_us_publink100029023
The payment you receive as the beneficiary of a decedent's Thrift Savings Plan (TSP) account is fully taxable. However, if you are the decedent's surviving spouse (or someone other than the employee's spouse making a transfer described under Rollovers by nonspouse beneficiary in Part II under Rollover Rules ), you generally can roll over the payment tax free. If you do not choose a direct rollover of the decedent's TSP account, mandatory 20% income tax withholding will apply. For more information, see Rollover Rules in Part II. If you are neither the surviving spouse nor someone other than the employee's spouse making a transfer described above, the payment is not eligible for rollover treatment. The TSP will withhold 10% of the payment for federal income tax, unless you gave the TSP a Form W-4P to choose not to have tax withheld.
If the entire TSP account balance is paid to the beneficiaries in the same calendar year, it may qualify as a lump-sum distribution eligible for the 10-year tax option if the plan participant was born before January 2, 1936. See Lump-Sum Distributions in Publication 575 for details. Also, see Important Tax Information About Thrift Savings Plan Death Benefit Payments, which is available from the TSP.
The above TSP document is also available on the TSP website at www.tsp.gov
. Select "Forms & Publications."
If you receive a payment from a uniformed services TSP account that includes contributions from combat zone pay, see Uniformed services Thrift Savings Plan (TSP) accounts, under Reminders near the beginning of this publication.
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed for the estate of a citizen or resident alien of the United States who died in 2008 if the gross estate is more than $2,000,000. Included in this $2,000,000 are any adjusted taxable gifts made by the decedent after 1976 and the specific exemption allowed for gifts by the decedent after September 8, 1976, and before 1977.
The gross estate generally includes the value of all property beneficially owned by the decedent at the time of death. Examples of property included in the gross estate are salary or annuity payments that had accrued to an employee or retiree, but which were not paid before death, and the balance in the decedent's TSP account.
The gross estate also usually includes the value of the death and survivor benefits payable under the CSRS or the FERS. If the federal employee died leaving no one eligible to receive a survivor annuity, the lump sum (representing the employee's contribution to the retirement system plus any accrued interest) payable to the estate or other beneficiary is included in the employee's gross estate. taxmap/pubs/p721-003.htm#en_us_publink100029027
The estate tax marital deduction is a deduction from the gross estate of the value of property that is included in the gross estate but that passes, or has passed, to the surviving spouse. Generally, there is no limit on the amount of the marital deduction. Community property passing to the surviving spouse qualifies for the marital deduction. taxmap/pubs/p721-003.htm#en_us_publink100029028
For more information, get Publication 950, Introduction to Estate and Gift Taxes, and Publication 559, Survivors, Executors, and Administrators.