This part of the publication is for survivors of federal retirees. It explains how to treat amounts you receive because of the retiree's death. If you are the survivor of a federal employee, see Part IV.taxmap/pubs/p721-004.htm#en_us_publink100029030
Retirement benefits accrued and payable to a CSRS or FERS retiree before death, but paid to you as a survivor, are taxable in the same manner and to the same extent these benefits would have been taxable had the retiree lived to receive them. taxmap/pubs/p721-004.htm#en_us_publink100029031
CSRS or FERS annuity payments you receive as the survivor of a federal retiree are fully or partly taxable under either the General Rule or the Simplified Method.taxmap/pubs/p721-004.htm#en_us_publink100029032
If the retiree reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor annuity payments are fully taxable. This is also true if the retiree had an annuity starting date after 1986, reported the annuity under the General Rule or the Simplified Method, and had fully recovered the cost tax free. taxmap/pubs/p721-004.htm#en_us_publink100029033
If the retiree was reporting the annuity under the General Rule, figure the tax-free part of the annuity using the same exclusion percentage that the retiree used. Apply the exclusion percentage to the amount specified as your survivor annuity at the retiree's annuity starting date. Do not apply the exclusion percentage to any cost-of-living increases made after that date. Those increases are fully taxable. For more information about the General Rule, get Publication 939. taxmap/pubs/p721-004.htm#en_us_publink100029034
If the retiree was reporting the annuity under the Simplified Method, your tax-free monthly amount is the same as the retiree's monthly exclusion (Worksheet A, line 4). This amount remains fixed even if the monthly payment is increased or decreased. A cost-of-living increase in your survivor annuity payments does not change the amount you can exclude from gross income. taxmap/pubs/p721-004.htm#en_us_publink100029035
If the retiree's annuity starting date was before 1987, you can exclude the tax-free amount from all the annuity payments you receive. This includes any payments received after you recover the cost tax free.
If the retiree's annuity starting date is after 1986, you can exclude the tax-free amount only until you recover the cost tax free. The annuity payments you receive after you recover the annuity cost tax free are fully taxable. taxmap/pubs/p721-004.htm#en_us_publink100029036
If the annuity starting date is after July 1, 1986, and the survivor 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/p721-004.htm#en_us_publink100029037
If the survivor benefits include both a life annuity for the surviving spouse and one or more temporary annuities for the retiree's children, the tax-free monthly amount that would otherwise apply to the life annuity must be allocated among the beneficiaries. To figure the tax-free monthly amount for each beneficiary, multiply it by a fraction. The numerator of the fraction is the beneficiary's monthly annuity and the denominator of the fraction is the total of the monthly annuity payments to all the beneficiaries. taxmap/pubs/p721-004.htm#en_us_publink100029038
John retired in 2006 and began receiving a $1,147 per month CSRS retirement annuity with a survivor annuity payable to his wife, Kate, upon his death. He reported his annuity using the Simplified Method. Under that method, $150 of each payment he received was a tax-free recovery of his $45,000 cost. John received a total of 22 monthly payments and recovered $3,300 of his cost tax free before his death in 2008. At John's death, Kate began receiving an annuity of $840 per month and their children, Sam and Lou, began receiving temporary annuities of $330 each per month. Kate must allocate the $150 tax-free monthly amount among the three annuities.
To find how much of the monthly exclusion to allocate to her own annuity, Kate multiplies the $150 tax-free monthly amount by the fraction $840 (her monthly annuity) over $1,500 (the total of her $840, Sam's $330, and Lou's $330 monthly annuities). Her resulting monthly exclusion is $84. In allocating the $150 monthly exclusion to each child's annuity, the $150 is multiplied by the fraction $330 (each child's monthly annuity) over $1,500. Each child's resulting monthly exclusion is $33.
Beginning with the month in which either child is no longer eligible for an annuity, Kate will reallocate the $150 monthly exclusion to her own annuity by multiplying the $150 by the fraction $840 over $1,170 (the total of her $840 and her other child's $330 monthly annuities). Her resulting monthly exclusion is $108. In reallocating the $150 monthly exclusion to the other child's annuity, the $150 is multiplied by the fraction $330 over $1,170. The other child's resulting monthly exclusion is $42.taxmap/pubs/p721-004.htm#en_us_publink100029039
If the survivor benefits include only a temporary annuity for the retiree's child, allocate the unrecovered cost over the number of months from the date the annuity started until the child reaches age 22. If more than one temporary annuity is paid, allocate the cost over the number of months until the youngest child reaches age 22, and allocate the tax-free monthly amount among the annuities in proportion to the monthly annuity payments. taxmap/pubs/p721-004.htm#en_us_publink100029040
If a deceased retiree has no beneficiary eligible to receive a survivor annuity, and the deceased retiree's annuity ends before an amount equal to the deceased retiree'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 estate or other beneficiary. The estate or other beneficiary rarely will have to include any part of the lump sum in gross income. The taxable amount is figured as follows.
Worksheet E. Lump-Sum Payment at End of Retiree's Annuity (With No Survivor Annuity)
|1.||Enter the lump-sum payment||1.|| |
|2.||Enter the amount of annuity received tax free by the retiree||2.|| |
|3.||Add lines 1 and 2||3.|| |
|4.||Enter the 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/p721-004.htm#en_us_publink100029041
If you receive an additional survivor annuity benefit from voluntary contributions to the CSRS, treat it separately from the annuity that comes from regular contributions. Each year you will receive a Form CSF 1099R that will show how much of your total annuity received in the past year was from each type of benefit.
Figure the taxable and tax-free parts of your additional survivor annuity benefit from voluntary contributions using the same rules that apply to regular CSRS and FERS survivor annuities, as explained earlier under CSRS or FERS Survivor Annuity.taxmap/pubs/p721-004.htm#en_us_publink100029042
Figure the taxable amount, if any, of a lump-sum payment of the retiree's unrecovered voluntary contributions plus any interest using the rules that apply to regular lump-sum CSRS or FERS payments, as explained earlier under Lump-Sum CSRS or FERS Payment.taxmap/pubs/p721-004.htm#en_us_publink100029043
If you receive a payment from the TSP account of a deceased federal retiree, the payment is fully taxable. However, if you are the retiree's surviving spouse (or someone other than the retiree's spouse making a transfer described under Rollovers by nonspouse beneficiary in Part II earlier under Rollover Rules), you generally can roll over the otherwise taxable payment tax free. If you do not choose a direct rollover of the TSP account, mandatory 20% federal 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 retiree'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 retiree chose to receive his or her account balance as an annuity, the payments you receive as the retiree's survivor are fully taxable when you receive them, whether they are received as annuity payments or as a cash refund of the remaining value of the amount used to purchase the annuity.
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.
A federal estate tax return may have to be filed for the estate of the retired employee. See Federal Estate Tax in Part IV.taxmap/pubs/p721-004.htm#en_us_publink100029046
Any income that a decedent had a right to receive and could have received had death not occurred and that was not properly includible in the decedent's final income tax return is treated as income in respect of a decedent. This includes retirement benefits accrued and payable to a retiree before death, but paid to you as a survivor.
If the federal estate tax was paid on the decedent's estate and you are required to include income in respect of a decedent in your gross income for any tax year, you can deduct the portion of the federal estate tax that is from the inclusion in the estate of the right to receive that amount. For this purpose, if the decedent died after the annuity starting date, the taxable portion of a survivor annuity you receive (other than a temporary annuity for a child) is considered income in respect of a decedent.
For more information, see Income in Respect of a Decedent in Publication 559.