How is Your Federal Retirement Income Taxed?

By on March 22, 2009 in Current Events, Retirement with 4 Comments

“If you drive a car, I’ll tax the street. If you get too cold, I’ll tax the heat. If you try to sit, I’ll tax the seat. If you try to walk, I’ll tax your feet.” If you retire from the federal government, I’ll tax your pension, TSP and Social Security. I’m the taxman.

Exactly how is your retirement income taxed? Let’s look at it one piece at a time.

Most of your CSRS or FERS pension will be taxable. You receive your already taxed contributions back without having to pay any more tax on them. Unfortunately, you receive them back over your life expectancy.

For a retiree who is age 55, that is 360 months, or 30 years. The bulk of the pension you receive consists of Uncle’s contributions and earnings on both Uncle’s contributions and your contributions. Each year OPM will send you a form 1099-R which lists your total annuity, the taxable portion of your annuity, and your total contributions to the retirement fund.

If you die before receiving your contributions back, your survivor (if you have elected a survivor annuity) will continue to receive your contributions back tax free. If you have no survivor, or if your survivor also dies before recouping your contributions, the remaining contributions may be taken as a miscellaneous itemized deduction on the tax return your executor files for the year of your death. The deduction is not subject to the usual 2% floor that is applied to miscellaneous itemized deductions.

If you live past your life expectancy, you will have gotten all your contributions back and your entire annuity will be taxable.

There is an exception, but you do not want to find yourself eligible for it. It is called the “alternative form of annuity”. If you have 9 months or less to live, OPM allows you to recoup all of your contributions in a lump sum. That would leave the (slightly) reduced annuity that you receive fully taxable.

Your TSP is fully taxable (but you knew that already). You paid no tax on the money you contributed and it grew tax free. With the TSP, unlike an IRA, if you retire in the year in which you turn 55 (or later) there will be no early withdrawal penalty assessed for withdrawals. You must begin taking TSP distributions by April 1st of the year after the year in which you turn 70 ½ or April 1st of the year after the year in which you retire if you are age 70 ½ or older when you retire. Your TSP distributions are taxed as you receive them.

Up to 85% of your Social Security can be taxable as well. To determine the portion of your SS which is taxable you add up ½ of your SS, all your taxable income and certain tax-exempt income. The following chart shows how much SS might be subject to tax.

 

Filing Status

Income

Taxable SS

Single Under $25,000 None
Single $25,000 to $34,000 Up to 50%
Single Over $34,000 Up to 85%
Joint Under $32,000 None
Joint $32,000 to $44,000 Up to 50%
Joint Over $44,000 Up to 85%

 

All of your retirement income is taxed at your rate for ordinary income.

John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.

© 2016 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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  1. Kelley O says:

    Is the social security SUPPLEMENT taxed like social security?

  2. Donald Davenport says:

    The Federal Government has at least three retirement plans (Social Security; Railroad Retirement Board; Federal Employees Retirement System) they are administering. Each plan has an administrative staff, offices, and overhead. A cost saving option would be to Consolidate all three government retirement program into one system that could save administrative costs and make all three of them uniform. Recent discussions have implied that phasing Social Security out is an option. My opinion is that this could be done the day-after the FERS pension is phased out.

    As a recent retiree I was exposed to the Federal Senior Citizen Tax, which is an extra tax on Social Security and/or Railroad Retirement benefits. It causes your taxable income to increase by taxing up to 85% of your Social Security and/or Railroad Retirement Benefits. Before 1984, Social Security benefits were tax exempt, then after a Greenspan Commission report pointed out that Social Security finances needed bolstering, congress changed the rules so a portion of Retirement Income became taxable. The limit was on 50% of the Social Security Benefits for (married filing jointly) returns that had more than $32,000 income. The algorithm increases the taxable income which in turn increases the Federal Income Tax burden on existing beneficiaries. The extra money was to be designated (Earmarked) to the Social Security Trust Fund. Then in 1993 the limits was raised to 85% and the base amount was raised to $44,000. The increased revenue was to be designated (Earmarked) to the Medicare Trust Fund. Taxable income is compounded by adding up to 85% of your retirement income. For Example: A $1,000 increase in income it could add as much as $1,850 to taxable income. The Senior Citizens Tax violates Article I, Section 8 of The Constitution of the United States of America. Section 8 requires that “..all Imposts and Excises shall be uniform throughout the United States.” A tax that eliminates Federal Government Workers and others that do not receive Social Security and/or Railroad Retirement Pension benefits is not uniform.

    Prior to retirement Social Security tax rate is 6.2% and Medicare is 1.45% for employed workers and double that amount for self-employed workers. Senior Citizen Tax rate for Social security and Medicare for the Senior Citizen Tax is dependent on the tax bracket that the taxpayers are in. Taxpayers in the 15% bracket would pay 15/6.2 = 2.4 times the normal rate for Social Security and 15/1.45 = 10.3 times the normal rate for Medicare. Is this even legal to charge a higher rate for Social Security and Medicare

  3. Dimdur says:

    And some states, like NJ tax EVERYTHING – even my TSP is considered “income” – so I have to declare it as such on NJ state income tax return.

  4. Dcalfine1397 says:

    Some states, like Alabama where I live, do not tax your retirement from the state level. Military, federal government, and railroad pensions fall into this category. We still have to pay federal tax but we get a break on state income tax requirements.

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