Form CSA 1099R is mailed to you by OPM each year. It will show any tax you had withheld. File a copy of Form CSA 1099R with your tax return if any federal income tax was withheld.

The choice for no withholding generally cannot be made for annuity payments to be delivered outside the United States and its possessions.

To choose no withholding if you are a U.S. citizen or resident, you must provide OPM with your home address in the United States or its possessions. Otherwise, OPM has to withhold tax. For example, OPM must withhold if you provide a U.S. address for a nominee, trustee, or agent (such as a bank) to whom the benefits are to be delivered, but you do not provide your own U.S. home address.

If you certify to OPM that you are not a U.S. citizen, a U.S. resident alien, or someone who left the United States to avoid tax, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. For details, see Publication 519, U.S.Tax Guide for Aliens.

If you give OPM a Form W–4P–A, Election of Federal Income Tax Withholding, you can choose not to have tax withheld or you can choose to have tax withheld depending on your marital status and withholding allowances. If you do not make either of these choices, OPM must withhold as if you were married with three withholding allowances.

If you leave the federal government before becoming eligible to retire and you apply for a refund of your CSRS or FERS contributions, or you die without leaving a survivor eligible for an annuity, you or your beneficiary will receive a distribution of your contributions to the retirement plan plus any interest payable. Tax will be withheld at a 20% rate on the interest distributed. However, tax will not be withheld if you have OPM transfer (roll over) the interest directly to your traditional IRA or other qualified plan. See Rollover Rules in Part II. If you receive only your contributions, no tax will be withheld.

Generally, a distribution that you receive from the Thrift Savings Plan (TSP) is subject to federal income tax withholding. The amount withheld is:

However, you usually can choose not to have tax withheld from TSP payments other than eligible rollover distributions. By January 31 after the end of the year in which you receive a distribution, the TSP will issue Form 1099–R showing the total distributions you received in the prior year and the amount of tax withheld.

For a detailed discussion of withholding on distributions from the TSP, see Important Tax Information About Payments From Your TSP Account, available from your agency personnel office or from the TSP.

Generally, you should make estimated tax payments for 2004 if you expect to owe at least $1,000 in tax (after subtracting your withholding and credits) and you expect your withholding and your credits to be less than the smaller of:

You do not have to pay estimated tax for 2004 if you were a U.S. citizen or resident for all of 2003 and you had no tax liability for the full 12-month 2003 tax year.

Form 1040–ES contains a worksheet that you can use to see if you should make estimated tax payments. For more information, see chapter 2 in Publication 505.

If you are the surviving spouse of a federal employee or retiree and your monthly annuity check includes a survivor annuity for one or more children, each child's annuity counts as his or her own income (not yours) for federal income tax purposes.

If your child can be claimed as a dependent, treat his or her annuity as unearned income to apply the filing requirements.

Form CSF 1099R will be mailed to you by January 31 after the end of each tax year. It will show the total amount of the annuity you received in the past year. It also should show, separately, the survivor annuity for a child or children. Only the part that is each individual's survivor annuity should be shown on that individual's Form 1040 or 1040A.

If your Form CSF 1099R does not show separately the amount paid to you for a child or children, attach a statement to your return, along with a copy of Form CSF 1099R, explaining why the amount shown on the tax return differs from the amount shown on Form CSF 1099R.

You may request a Summary of Payments, showing the amounts paid to you for your child(ren), from OPM by calling OPM's Retirement Information Office at 1–888–767–6738 (customers within the local Washington, D.C. calling area must call 202–606–0500). You will need your CSF claim number and your social security number when you call.

To find the taxable part of each annuity, see the discussion in Part IV, Rules for Survivors of Federal Employees, or Part V, Rules for Survivors of Federal Retirees, whichever applies.

The statement you received from OPM when your CSRS or FERS annuity was approved shows the commencing date (the annuity starting date), the gross monthly rate of your annuity benefit, and your total contributions to the retirement plan (your cost). You will use this information to figure the tax-free recovery of your cost.

If you retire from federal government service on a regular annuity, your annuity starting date is the commencing date on your annuity statement from OPM. If something delays payment of your annuity, such as a late application for retirement, it does not affect the date your annuity begins to accrue or your annuity starting date.

This is the amount you were to get after any adjustment for electing a survivor's annuity or for electing the lump-sum payment under the alternative annuity option (if either applied) but before any deduction for income tax withholding, insurance premiums, etc.

Your monthly annuity payment contains an amount on which you have previously paid income tax. This amount represents part of your contributions to the retirement plan. Even though you did not receive the money that was contributed to the plan, it was included in your gross income for federal income tax purposes in the years it was taken out of your pay.

The cost of your annuity is the total of your contributions to the retirement plan, as shown on your annuity statement from OPM. If you elected the alternative annuity option, it includes any deemed deposits and any deemed redeposits that were added to your lump-sum credit. (See Lump-sum credit under Alternative Annuity Option, later.)

If you repaid contributions that you had withdrawn from the retirement plan earlier, or if you paid into the plan to receive full credit for service not subject to retirement deductions, the entire repayment, including any interest, is a part of your cost. You cannot claim an interest deduction for any interest payments. You cannot treat these payments as voluntary contributions; they are considered regular employee contributions.

How you figure the tax-free recovery of the cost of your CSRS or FERS annuity depends on your annuity starting date.

Under both the General Rule and the Simplified Method, each of your monthly annuity payments is made up of two parts: the tax-free part that is a return of your cost, and the taxable part that is the amount of each payment that is more than the part that represents your cost. The tax-free part is a fixed dollar amount. It remains the same, even if your annuity is increased. Generally, this rule applies as long as you receive your annuity. However, see Exclusion limit, later.

If you retired without a survivor annuity and report your annuity under the Simplified Method, do not change your tax-free monthly amount even if you later choose a survivor annuity.

If you retired without a survivor annuity and report your annuity under the General Rule, you must figure a new exclusion percentage if you later choose a survivor annuity. To figure it, reduce your cost by the amount you previously recovered tax free. Figure the expected return as of the date the reduced annuity begins. For details on the General Rule, see Publication 939.

If you notify OPM that your marriage has ended, your annuity might be increased to remove the reduction for a survivor benefit. The increased annuity does not change the cost recovery you figured at the annuity starting date. The tax-free part of each annuity payment remains the same.

For more information about choosing or canceling a survivor annuity after retirement, contact OPM's Retirement Information Office at 1–888–767–6738 (customers within the local Washington, D.C. calling area must call 202–606–0500).

If your annuity starting date is after 1986, the total amount of annuity income that you (or the survivor annuitant) can exclude over the years as a return of your cost may not exceed your total cost. Annuity payments you or your survivors receive after the total cost in the plan has been recovered are fully taxable.

If your annuity starting date is before 1987, you continue to take your monthly exclusion figured under the General Rule or Simplified Method for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor continues to take that same exclusion. The total exclusion may be more than your cost.

If your annuity starting date is after July 1, 1986, and the cost of your annuity has not been fully recovered at your (or the survivor annuitant's) death, a deduction is allowed for the unrecovered cost. The deduction is claimed on your (or your survivor's) final tax return as a miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income limit). If your annuity starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost at death.

Use Worksheet A, Simplified Method (near the end of this publication), to figure your taxable annuity. Be sure to keep the completed worksheet. It will help you figure your taxable amounts for later years.

See Your cost, earlier, for an explanation of your cost in the plan. If your annuity starting date is after November 18, 1996, and you chose the alternative annuity option (explained later), you must reduce your cost by the tax-free part of the lump-sum payment you received.

Find the appropriate number from one of the tables at the bottom of the worksheet. If your annuity starting date is after 1997, use:

If your annuity starting date is before 1998, use Table 1.

If you retired before 2003, the amount previously recovered tax free that you must enter on line 6 is the total amount from line 10 of last year's worksheet. If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, it includes the tax-free part of the lump-sum payment you received.

Use Worksheet B, Lump-Sum Payment (near the end of this publication), to figure the taxable part of your lump-sum payment. Be sure to keep the completed worksheet for your records.

To complete the worksheet, you will need to know the amount of your lump-sum credit and the present value of your annuity contract.

Generally, this is the same amount as the lump-sum payment you receive (the total of your contributions to the retirement system). However, for purposes of the alternative annuity option, your lump-sum credit also may include deemed deposits and redeposits that OPM advanced to your retirement account so that you are given credit for the service they represent. Deemed deposits (including interest) are for federal employment during which no retirement contributions were taken out of your pay. Deemed redeposits (including interest) are for any refunds of retirement contributions that you received and did not repay. You are treated as if you had received a lump-sum payment equal to the amount of your lump-sum credit and then had made a repayment to OPM of the advanced amounts.

The present value of your annuity contract is figured using actuarial tables provided by the IRS.

If you choose the alternative annuity option, you usually will receive the lump-sum payment in two equal installments. You will receive the first installment after you make the choice upon retirement. The second installment will be paid to you, with interest, in the next calendar year. (Exceptions to the installment rule are provided for cases of critical medical need.)

Even though the lump-sum payment is made in installments, the overall tax treatment (explained at the beginning of this discussion) is the same as if the whole payment were paid at once. If the payment has a tax-free part, you must treat the taxable part as received first.

Add any actual or deemed payment of your lump-sum credit (defined earlier) to the total for line 16a, Form 1040, or line 12a, Form 1040A. Add the taxable part to the total for line 16b, Form 1040, or line 12b, Form 1040A, unless you roll over the taxable part to your traditional IRA or a qualified retirement plan.

If you receive the lump-sum payment in two installments, include any interest paid with the second installment on line 8a of either Form 1040 or Form 1040A.

If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, the taxable and tax-free parts of your lump-sum payment and your annuity payments are figured using different rules. Under those rules, you do not reduce your cost in the plan (line 2 of Worksheet A) by the tax-free part of the lump-sum payment. However, you must include that tax-free amount with other amounts previously recovered tax free (line 6 of Worksheet A) when limiting your total exclusion to your total cost.

If the gift is an interest in a joint and survivor annuity where only you and your spouse can receive payments before the death of the last spouse to die, the gift generally will qualify for the unlimited marital deduction. This will eliminate any gift tax liability with regard to that gift.

If you provide survivor annuity benefits for someone other than your current spouse, such as your former spouse, the unlimited marital deduction will not apply. This may result in a taxable gift.

For information about the gift tax, see Publication 950, Introduction to Estate and Gift Taxes and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and its instructions.

Treat a payment for accrued annual leave received on retirement as a salary payment. It is taxable as wages in the tax year you receive it.

Voluntary contributions to the retirement fund are those made in addition to the regular contributions that were deducted from your salary. They also include the regular contributions withheld from your salary after you have the years of service necessary for the maximum annuity allowed by law. Voluntary contributions are not the same as employee contributions to the Thrift Savings Plan. See Thrift Savings Plan, later.

If you choose an additional annuity benefit from your voluntary contributions, it is treated separately from the annuity benefit that comes from the regular contributions deducted from your salary. This separate treatment applies for figuring the amounts to be excluded from, and included in, gross income. It does not matter that you receive only one monthly check covering both benefits. Each year you will receive a Form CSA 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 monthly benefits from voluntary contributions using the rules that apply to regular CSRS and FERS annuities, as explained earlier.

If you choose a refund of your voluntary contributions plus accrued interest, the interest is taxable to you in the tax year it is distributed unless you roll it over to a traditional IRA or another qualified retirement plan. If you do not have OPM transfer the interest to a traditional IRA or other qualified retirement plan in a direct rollover, tax will be withheld at a 20% rate. See Rollover Rules, later. The interest does not qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. It also may be subject to an additional 10% tax on early distributions if you separate from service before the calendar year in which you reach age 55. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.

State community property laws apply to your annuity. These laws will affect your income tax only if you file a return separately from your spouse.

Generally, the determination of whether your annuity is separate income (taxable to you) or community income (taxable to both you and your spouse) is based on your marital status and domicile when you were working. Regardless of whether you are now living in a community property state or a noncommunity property state, your current annuity may be community income if it is based on services you performed while married and domiciled in a community property state.

At any time, you have only one domicile even though you may have more than one home. Your domicile is your fixed and permanent legal home to which, when absent, you intend to return. The question of your domicile is mainly a matter of your intentions as indicated by your actions.

If your annuity is a mixture of community income and separate income, you must divide it between the two kinds of income. The division is based on your periods of service and domicile in community and noncommunity property states while you were married.

For more information, see Publication 555, Community Property.

Your contributions to the retirement plan (your cost) also include the government's contributions to the plan to a certain extent. You include government contributions that would not have been taxable to you at the time they were contributed if they had been paid directly to you. For example, government contributions would not have been taxable to you if, at the time made, your services were performed outside the United States. Thus, your cost is increased by these government contributions and the benefits that you, or your beneficiary, must include in income are reduced.

This method of figuring your total contributions does not apply to any contributions the government made on your behalf after you became a citizen or resident of the United States.

There is a limit on the taxable amount of payments received from the CSRS, the FERS, or the TSP by a nonresident alien retiree or nonresident alien beneficiary. This limited taxable amount is in the same proportion to the otherwise taxable amount that the retiree's total U.S. Government basic pay, other than tax-exempt pay for services performed outside the United States, is to the retiree's total U.S. Government basic pay for all services.

Basic pay includes regular pay plus any standby differential. It does not include bonuses, overtime pay, certain retroactive pay, uniform or other allowances, or lump-sum leave payments.

To figure the limited taxable amount of your CSRS or FERS annuity or your TSP distributions, use the following worksheet. (For an annuity, first complete Worksheet A in this publication.)

If you have a uniformed services TSP account that includes contributions from combat zone pay, the distributions attributable to those contributions are tax exempt. However, any earnings on those contributions are subject to tax when they are distributed. The statement you receive from the TSP will state the total amount of your distribution and the amount of your taxable distribution for the year. You can get more information from the TSP website, www.tsp.gov or the TSP Service Office.

If you ask the TSP to transfer any part of the money in your account to a traditional IRA or other qualified retirement plan, the tax on that part is deferred until you receive payments from the traditional IRA or other plan. See Rollover Rules, later.

If you ask the TSP to buy an annuity with the money in your account, the annuity payments are taxed when you receive them. The payments are not subject to the additional 10% tax on early distributions, even if you are under age 55 when they begin.

If you withdraw any of the money in your TSP account, it is taxed as ordinary income when you receive it unless you roll it over into a traditional IRA or other qualified plan. (See Rollover Rules, later.) If you receive your entire TSP account balance in a single tax year, you may be able to use the 10-year tax option to figure your tax. See Lump-Sum Distributions in Publication 575 for details.

To qualify for the 10-year tax option, the plan participant must have been born before January 2, 1936.

If you receive a single payment or you choose to receive your account balance in monthly payments over a period of less than 10 years, the TSP generally must withhold 20% for federal income tax. If you choose to receive your account balance in monthly payments over a period of 10 or more years or a period based on your life expectancy, the payments are subject to withholding under the same rules as your CSRS or FERS annuity. See Tax Withholding and Estimated Tax in Part I.

Any money paid to you from your TSP account before you reach age 59½ may be subject to an additional 10% tax on early distributions. However, this additional tax does not apply in any of the following situations.

For more information, see Tax on Early Distributions in Publication 575.

If the TSP declares a distribution from your account because money you borrowed has not been repaid when you separate from government service, your account is reduced and the amount of the distribution (your unpaid loan balance and any unpaid interest) is taxed in the year declared. The distribution also may be subject to the additional 10% tax on early distributions. However, the tax will be deferred if you make a rollover contribution to a traditional IRA or other qualified plan equal to the declared distribution amount. See Rollover Rules, next. If you withdraw any money from your TSP account in that same year, the TSP must withhold income tax of 20% of the total of the declared distribution and the amount withdrawn.

For more information about the TSP, see Summary of the Thrift Savings Plan for Federal Employees, distributed to all federal employees. Also, see Important Tax Information About Payments From Your TSP Account and Tax Treatment of Thrift Savings Plan Payments to Nonresident Aliens and Their Beneficiaries, which are available from your agency personnel office or from the TSP.

The above documents are also available on the Internet at www.tsp.gov. Select “Forms & Publications.”

For this purpose, a qualified retirement plan generally is:

The CSRS, FERS, and TSP are considered qualified retirement plans.

If you receive a refund of your CSRS or FERS contributions when you leave government service, you can roll over any interest you receive on the contributions. You cannot roll over any part of your CSRS or FERS annuity payments.

You can roll over a distribution of any part of your TSP account balance except:

In addition, a distribution to your beneficiary generally is not treated as an eligible rollover distribution. However, see Qualified domestic relations order (QDRO) and Rollover by surviving spouse, later.

You can choose to have the OPM or TSP transfer any part of an eligible rollover distribution directly to another qualified retirement plan that accepts rollover distributions or to a traditional IRA. The distribution cannot be rolled over into a Roth IRA.

If you choose the direct rollover option, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan.

If an eligible rollover distribution is paid to you, the OPM or TSP must withhold 20% for income tax even if you plan to roll over the distribution to another qualified retirement plan or traditional IRA. However, the full amount is treated as distributed to you even though you actually receive only 80%. You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional IRA.

Withholding from an eligible rollover distribution paid to you is not required if the distributions for your tax year total less than $200.

A lump-sum distribution may qualify for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. See Lump-Sum Distributions in Publication 575. However, if you roll over any part of the distribution, the part you keep does not qualify for this special tax treatment.

If you want to roll over more of an eligible rollover distribution than the amount you received after income tax was withheld, you will have to add funds from some other source (such as your savings or borrowed amounts).

You generally must complete the rollover of an eligible rollover distribution by the 60th day following the day on which you receive the distribution.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. For more information on this waiver see Revenue Procedure 2003–16, in Internal Revenue Bulletin 2003–4. If you need to apply for a waiver, you must request a letter ruling. See Revenue Procedures 2003–4 and 2003–8 in Internal Revenue Bulletin 2003–1.

A letter ruling is not required if a financial institution receives the rollover funds during the 60-day rollover period, you follow all procedures required by the financial institution, and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement account within the 60-day rollover period.

If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended. An amount is a frozen deposit if you cannot withdraw it because of either:

The 60-day rollover period is extended by the period for which the amount is a frozen deposit and does not end earlier than 10 days after the amount is no longer a frozen deposit.

You may be able to roll over tax free all or part of a distribution you receive from the CSRS, the FERS, or the TSP under a court order in a divorce or similar proceeding. You must receive the distribution as the government employee's spouse or former spouse (not as a nonspousal beneficiary). The rollover rules apply to you as if you were the employee. You can roll over the distribution if it is an eligible rollover distribution (described earlier) and it is made under a QDRO or, for the TSP, a qualifying order.

A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights. The payments must be made to a spouse, former spouse, child, or other dependent of a participant in the plan. For the TSP, a QDRO can be a qualifying order, but a domestic relations order can be a qualifying order even if it is not a QDRO. For example, a qualifying order can include an order that requires a TSP payment of attorney's fees to the attorney for the spouse, former spouse, or child of the participant.

The order must contain certain information, including the amount or percentage of the participant's benefits to be paid to each payee. It cannot require the plan to pay benefits in a form not offered by the plan, nor can it require the plan to pay increased benefits.

A distribution that is paid to a child, dependent, or, if applicable, an attorney for fees, under a QDRO or a qualifying order is taxed to the plan participant.

You may be able to roll over tax free all or part of the CSRS, FERS, or TSP distribution you receive as the surviving spouse of a deceased employee. The rollover rules apply to you as if you were the employee. You generally can roll over the distribution into a qualified retirement plan or a traditional IRA.

A distribution paid to a beneficiary other than the employee's surviving spouse is not an eligible rollover distribution.

On your Form 1040, report the total distributions from the CSRS, FERS, or TSP on line 16a. Report the taxable amount of the distributions (total distribution less the amount rolled over) on line 16b. If you file Form 1040A, report the total distributions on line 12a and the taxable amount on line 12b.

The TSP or OPM must provide a written explanation to you within a reasonable period of time before making an eligible rollover distribution to you. It must tell you about all of the following.

The TSP or OPM must provide you with a written explanation no earlier than 90 days and no later than 30 days before the distribution is made. However, you can choose to have the TSP or OPM make a distribution less than 30 days after the explanation is provided, as long as the following two requirements are met.

Contact the TSP or OPM if you have any questions about this information.

Table 1 may help you decide which distribution option to choose. Carefully compare the effects of each option.

This is the age at which you first could receive an annuity were you not disabled. This generally is based on your age and length of service.

In most cases, under the CSRS, the minimum combinations of age and service for retirement are:

In most cases, the minimum age for retirement under the FERS is between ages 55 and 57 with at least 10 years of service. With at least 5 years of service, your minimum retirement age cannot be older than age 62. Your minimum retirement age with at least 10 years of service is shown in Table 2.

The minimum retirement age for law enforcement, firefighter, or air traffic controller service is age 50 with 20 years of covered service or any age with 25 years of covered service.

You must report all your disability annuity payments received before minimum retirement age on line 7 (Form 1040 or Form 1040A).

For income tax withholding purposes, a disability annuity is treated the same as a nondisability annuity. This treatment also applies to disability payments received before minimum retirement age when these payments are shown as wages on your return. See Tax Withholding and Estimated Tax in Part I.

FECA payments you receive for personal injuries or sickness resulting from the performance of your duties are like workers' compensation. They are tax exempt and are not treated as disability income or annuities. However, payments you receive while your claim is being processed, including pay while on sick leave and continuation of pay for up to 45 days, are taxable.

If you repay sick leave or disability annuity payments you received in an earlier year to be eligible for nontaxable FECA benefits, you can deduct the amount you repay. You can claim the deduction whether you repay the amount yourself or have the FECA payment sent directly to your employing agency or the OPM.

Claim the deduction on Schedule A (Form 1040) as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. It is considered a business loss and may create a net operating loss if your deductions for the year are more than your income for the year. Get Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, for more information. The repayment is not eligible for the special tax credit that applies to repayments over $3,000 of amounts received under a claim of right.

If you repay sick leave or disability annuity payments in the same year you receive them, the repayment reduces the taxable sick pay or disability annuity you include in income. Do not deduct it separately.

Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.

Disability payments for injuries incurred as a direct result of a military action involving the Armed Forces of the United States and resulting from violence or aggression against the United States or any of its allies (or threat thereof), are not included in income.

If you received tax-exempt benefits from the Department of Veterans Affairs for personal injuries resulting from active service in the armed forces and later receive a CSRS or FERS disability annuity for disability arising from the same injuries, you cannot treat the disability annuity payments as tax-exempt income. They are subject to the rules described earlier under Disability Annuity.

When you retire, any payment for your unused annual leave is taxed as wages in the tax year you receive the payment.

You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A physician must certify that your condition is expected to result in death or has lasted, or can be expected to last, continuously for 12 months or more. Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit.

If you are under 65, you must have your physician complete a statement certifying that you are permanently and totally disabled on the date you retired. You must keep this statement for your tax records. You can use the Physician's Statement in the instructions for either Schedule R (Form 1040) or Schedule 3 (Form 1040A).

This is the age set by your employer at which you would have had to retire if you had not become disabled. There is no mandatory retirement age for most federal employees. However, there is a mandatory retirement age for the following employees.

If you figure the credit yourself, fill out the front of Schedule R (if you are filing Form 1040) or Schedule 3 (if you are filing Form 1040A). Next, fill out Part III of the schedule.

If you want the Internal Revenue Service to figure your tax and credits, including the credit for the elderly or the disabled, see Publication 967, The IRS Will Figure Your Tax, and the instructions for Schedule R (Form 1040) or Schedule 3 (Form 1040A).

For detailed information about this credit, get Publication 524, Credit for the Elderly or Disabled.

Salary or wages earned by a federal employee but paid to the employee's survivor or beneficiary after the employee's death are income in respect of the decedent. This income is taxable to the survivor or beneficiary. This treatment also applies to payments for accrued annual leave.

The Public Safety Officers' Benefits program, administered through the Bureau of Justice Assistance, provides a tax-free death benefit to eligible survivors of public safety officers whose death is the direct and proximate result of a traumatic injury sustained in the line of duty. The death benefit is not includible in the decedent's gross estate for federal estate tax purposes or the survivor's gross income for federal income tax purposes.

A public safety officer is a law enforcement officer, firefighter, or member of a public rescue squad or ambulance crew. In certain circumstances, a chaplain killed in the line of duty is also a public safety officer. The chaplain must have been responding to a fire, rescue, or police emergency as a member or employee of a fire or police department.

This program may pay survivors a temporary benefit up to $3,000 if it finds that the death of the public safety officer is one for which a final benefit will probably be paid. If there is no final payment, the recipient of the temporary benefit is liable for repayment. However, the Bureau may not require all or part of the repayment if it will cause a hardship. If that happens, that amount is tax free.

For more information on this program, you may contact the Bureau of Justice Assistance by calling 1–888–744–6513, or 202–307–0635 if you are in the metropolitan Washington, D.C., calling area.

Additional information about this program is also available on the Internet at www.ojp.usdoj.gov/BJA.

Under the Simplified Method, you figure the tax-free part of each full monthly annuity payment by dividing the employee's cost by a number of months based on your age. This number will differ depending on whether your annuity starting date is on or before November 18, 1996, or later. To use the Simplified Method, complete Worksheet A. Specific instructions for Worksheet A are given in Part II under Simplified Method.

If the survivor benefits include both a life annuity for the surviving spouse and one or more temporary annuities for the employee's children, an additional step is needed under the Simplified Method to allocate the monthly exclusion among the beneficiaries correctly.

Figure the total monthly exclusion for all beneficiaries by completing lines 2 through 4 of Worksheet A as if only the surviving spouse received an annuity. Then, to figure the monthly exclusion for each beneficiary, multiply line 4 of the worksheet by a fraction. For any beneficiary, the numerator (top number) of the fraction is that beneficiary's monthly annuity and the denominator (bottom number) of the fraction is the total of the monthly annuity payments to all the beneficiaries.

The ending of a child's temporary annuity does not affect the total monthly exclusion figured under the Simplified Method. The total exclusion merely needs to be reallocated at that time among the remaining beneficiaries. If only the surviving spouse is left drawing an annuity, the surviving spouse is entitled to the entire monthly exclusion as figured in the worksheet.

A method similar to the Simplified Method also can be used to figure the taxable and nontaxable parts of a temporary annuity for a surviving child when there is no surviving spouse annuity. To use this method, divide the deceased employee's cost by the number of months from the child's annuity starting date until the date the child will reach age 22. The result is the monthly exclusion. (However, the monthly exclusion cannot be more than the monthly annuity payment. You can carry over unused exclusion amounts to apply against future annuity payments.)

If there is more than one child entitled to a temporary annuity (and no surviving spouse annuity), divide the cost by the number of months of payments until the date the youngest child will reach age 22. This monthly exclusion must then be allocated among the children in proportion to their monthly annuity payments, like the exclusion shown in the previous example.

If a child otherwise entitled to a temporary annuity was permanently disabled at the annuity starting date (and there is no surviving spouse annuity), that child is treated for tax purposes as receiving a lifetime annuity, like a surviving spouse. The child must complete line 3 of Worksheet A using a number in Table 1 at the bottom of the worksheet corresponding to the child's age at the annuity starting date. If more than one child is entitled to a temporary annuity, an allocation like the one shown under Surviving spouse with child, earlier, must be made to determine each child's share of the exclusion.

If your annuity starting date is after 1986, the most that can be recovered tax free is the cost of the annuity. Once the total of your exclusions equals the cost, your entire annuity is taxable. If your annuity starting date is before 1987, the tax-free part of each whole monthly payment remains the same each year you receive payments—even if you outlive the number of months used on line 3 of the Simplified Method Worksheet. The total exclusion may be more than the cost of the annuity.

If the annuity starting date is after July 1, 1986, and the 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.

If an annuity is paid to the federal employee's survivor and the survivor annuity ends before an amount equal to the deceased employee'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 employee's estate or other beneficiary. Generally, this beneficiary will not have to include any of the lump sum in gross income because, when it is added to the amount of the annuity previously received that was excludable, it still will be less than the employee's total contributions.

To figure the taxable amount, if any, use the following worksheet.

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. It 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.

If a CSRS employee dies before retiring from government service, any voluntary contributions to the retirement fund cannot be used to provide an additional annuity to the survivors. Instead, the voluntary contributions plus any accrued interest will be paid in a lump sum to the estate or other beneficiary. The beneficiary generally must include any interest received in income for the year distributed or made available. However, if the beneficiary is the employee's surviving spouse, the interest can be rolled over. See Rollover by surviving spouse under Rollover Rules in Part II.

The interest, if not rolled over, generally is subject to federal income tax withholding at a 20% rate (or 10% rate if the beneficiary is not the employee's surviving spouse). It may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if:

For more information, see Lump-Sum Distributions in Publication 575.

The estate tax marital deduction is a deduction from the gross estate of the value of property that is included in the gross estate but that passes, or has passed, to the surviving spouse. Generally, there is no limit on the amount of the marital deduction. Community property passing to the surviving spouse qualifies for the marital deduction.

For more information, get Publication 950, Introduction to Estate and Gift Taxes, and Publication 559, Survivors, Executors, and Administrators.

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.

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.

If the retiree was reporting the annuity under the General Rule, use 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.

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 (from line 4 of Worksheet A). 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.

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.

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.

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.

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.

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.

If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.