With tax time approaching, it is a good time for federal retirees to review the taxability of their various sources of retirement income. Retirees have contributed to their CSRS or FERS pension from after tax dollars. However, the bulk of the income they will receive will be taxable. Previous articles on Fedsmith have explained how federal pensions are taxed.
There should be no question as to how TSP income is taxed. If a person is receiving payments from their TSP, the money they receive is fully taxable. With the 2012 advent of a Roth TSP option this will change for future retirees who choose the Roth option. The TSP publication Tax Notice: Payments from Your TSP Account has detailed information about the taxation and withholding that applies to TSP payments. This publication is updated each year, with its most recent revision in December of 2010.
Special attention to TSP withholding needs to be given by those who are planning on rolling over their TSP account to an IRA or other tax deferred plan. (See Your TSP: Roll it or Leave It?)
FERS employees and CSRS Offset employees earn Social Security credits while employed. Some CSRS employees may have earned 40 credits and may be entitled to receive Social Security retirement benefits. It might come as a surprise that up to 85% of those benefits could also be subject to federal income tax.
To determine how much of a Social Security benefit is taxable, the recipient adds together:
This income is then compared to the “base amounts” for taxing Social Security income. By the way, the following base amounts are not indexed for inflation.
For single filing status the amounts are:
For joint filing status the amounts are:
Here’s an example: You’re married filing jointly and your income for the purpose of determining how much of your SS is subject to taxation is $42,000. This amount includes ½ of your $12,000 SS benefit. This income exceeds the $32,000 base amount by $10,000. The amount of your SS that would be taxable would be either 50% of your SS benefit ($6,000) or ½ of the amount over the base amount ($5,000). $5,000 would be the amount that was taxable. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits explains this in more depth.
In addition, fourteen states tax SS benefits. Kiplinger’s provides a “tax map.”
All of the above sources of retirement income (CSRS/FERS, TSP and Social Security) are taxable as ordinary income.