FEDERAL BENEFITS IN-DEPTH
ARE YOU PAYING
TOO MUCH IN TAXES ON YOUR FEDERAL ANNUITY?
I
n the February 2018 issue of narfe magazine (p 18), the “Focus on Federal Benefits” section of the Q&A column provided details on the Civil Service Retirement and Disability Fund (CSRDF). As a federal employee with Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS) retirement coverage, the deductions you have withheld from your federal civilian pay for the CSRDF are withheld by the agency payroll office on a posttax basis, which means it doesn’t lower your taxable income while you are working. (This is unlike deduction contributions to the Thrift Savings Plan (TSP) and flexible spending accounts as well as Federal Employees Health Benefits (FEHB) premiums, which are usually withheld on a pretax basis.) Additional post-tax contributions to the CSRDF may be made through deposits/redeposits for non-deduction/refunded federal service and/or CSRS Voluntary Contributions. The amount of these deductions/contributions are totaled by the Office of Personnel Management (OPM) during the adjudication of your retirement from federal service, and this total amount will be included in the initial retirement documentation you receive from OPM. In addition, you will receive a Form 1099-R from OPM each January, which is used for filing the previous year’s tax return (refer to Box 9b). Annuitants receive CSA 1099R forms and survivor annuitants receive CSF 1099-R forms. Uncle Sam doesn’t tax you on the same money twice, so it’s
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important to know how much of your annuity from OPM is tax-free each year and how long it will remain tax-free. For many annuitants, OPM computes the taxable amount of your annuity and makes this available on Form 1099-R in Box 2a, and you simply use this figure when reporting your taxable income. Keep in mind (as explained further below) that it’s up to you to know when this reduction in taxable income no longer applies. You can only use this reduced amount on your tax return until you have recouped your contributions dollar for dollar. 2a Taxable Amount $
UNKNOWN
However, if the taxable amount of your annuity on 1099-R, Box 2a, is marked as “Unknown,” this means that OPM did not calculate the tax-free portion of your annuity, and it is your responsibility to do so. The following are the most common reasons why OPM does not calculate the tax-free portion of your annuity: • You have a disability retirement. • You retired prior to November 19, 1996. • You have CSRS Voluntary Contributions. • Your former spouse receives a portion of your annuity pursuant to a court order. • Your case has not been finalized and you are in interim pay status. • You have survivor benefits payable; and/or, • Your case is with the Office of Workers Compensation.
CORRECTED If 1099-R, Box 2a, annuity is marked as “Unknown,” OPM refers you to IRS Publication 721, “Tax Guide to U.S. Civil Service Retirement Benefits,” and provides you with a tax-free calculator that is simple to use. However, if you weren’t aware of this, and you have been reporting the amount of gross distribution from Box 1 as your taxable income, then it’s possible that you may have been paying too much in taxes. If you have been doing this, the IRS allows you to amend only the last three tax returns, but there’s nothing wrong with reducing the taxable amount moving forward until you have recouped your contributions dollar for dollar. Just be sure to track this. When Box 2a is marked as “Unknown,” you need to calculate the tax-free portion of your benefit so you can subtract that from the amount you received in Box 1. The easy-to-use tax-free calculator on OPM’s website is at https://apps.opm. gov/tax_calc/index.cfm. If someone else prepares your tax return for you, refer them to this online calculator as well as IRS Publication 721 (www.irs. gov/pub/irs-pdf/p721.pdf). As previously mentioned, you are eligible to claim this tax-free income only until your total taxfree benefits claimed equal your retirement contributions (from Box 9b). After that, all your benefits are taxable. For an example, see the sidebar on p. 25. Keep in mind that there are some scenarios that OPM’s