Taxes and Your Federal Employee Retirement
By John Grobe
Wednesday, February 6, 2008
We are in the early stages of "tax time." Some of us may have already filed our returns, particularly if we are expecting a refund. Others may be waiting until the last minute, either because we owe money, or because we tend to put off doing things we don't like.
If you're retired, you already know that most of your CSRS or FERS annuity is subject to federal income tax. If you're still working, you'll find it out soon enough. In fact, the Office of Personnel Management will tell you how much of your annual annuity is subject to federal income tax on the form 1099-R that they send you each January.
Our contributions to the retirement fund have been taken out of after tax dollars and we will not have to pay tax on them when we receive them back through our annuity. We do, however, only receive a portion back in each monthly annuity payment. We will not recoup it all until we have reached our life expectancy (as determined by the IRS). Here's an example of a CSRS retiree. This retiree is 57 years old, with a 56 year old spouse and has elected a survivor annuity.
| Total Yearly Pension | $35,000 |
| Total Retirement Contributions | $64,000 |
| Life Expectancy (in months) | 360 |
| Amount of monthly annuity derived from own contributions | $178 |
| Annual "tax-free" amount | $2136 |
| Taxable portion of annuity | $32,864 |
If the retiree dies before recouping the tax-free contributions, the surviving spouse will continue to recoup them. If both die before recovering the contributions, the unrecovered amount will be a tax deduction on the final income tax return. If the contributions are recovered before death, the entire annuity will be subject to federal income tax.
State tax laws vary. The website of the National and Active Retired Federal Employees Association has a list of how each state taxes our annuities. They update the list each filing season. When reading the list, it is important to read the footnotes. For example the 2006 list states that, in Wisconsin, civil service annuities are totally exempt from state taxation. However, the footnote says that the exemption only applies to retirement accounts that were established before 1964.
It is important to note that states cannot impose "source taxes" where they can tax your pension if it was earned while working in their state, even if you reside elsewhere. Former Californians who moved to Nevada are very thankful for this.
© 2008 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.
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