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Hrblock taxcut Publication 721 - Main Content Table of Contents Part I General InformationRefund of Contributions Tax Withholding and Estimated Tax Filing Requirements Part II Rules for RetireesAnnuity starting date. Hrblock taxcut Gross monthly rate. Hrblock taxcut Your cost. Hrblock taxcut Choosing a survivor annuity after retirement. Hrblock taxcut Canceling a survivor annuity after retirement. Hrblock taxcut Annuity starting date after 1986. Hrblock taxcut Annuity starting date before 1987. Hrblock taxcut Simplified Method General Rule Three-Year Rule Alternative Annuity Option Federal Gift Tax Retirement During the Past Year Reemployment After Retirement Nonresident Aliens Thrift Savings Plan Rollover Rules Distributions Used To Pay Insurance Premiums for Public Safety Officers How To Report Benefits Part III Rules for Disability Retirement and Credit for the Elderly or the DisabledDisability Annuity Other Benefits Credit for the Elderly or the Disabled Part IV Rules for Survivors of Federal EmployeesFERS Death Benefit CSRS or FERS Survivor Annuity Lump-Sum CSRS or FERS Payment Thrift Savings Plan Federal Estate Tax Part V Rules for Survivors of Federal RetireesCSRS or FERS Survivor Annuity Lump-Sum CSRS or FERS Payment Voluntary Contributions Thrift Savings Plan Federal Estate Tax Income Tax Deduction for Estate Tax Paid How To Get Tax HelpLow Income Taxpayer Clinics Part I General Information This part of the publication contains information that can apply to most recipients of civil service retirement benefits. Hrblock taxcut Refund of Contributions If you leave federal government service or transfer to a job not under the CSRS or FERS and you are not eligible for an immediate annuity, you can choose to receive a refund of the money in your CSRS or FERS retirement account. Hrblock taxcut The refund will include both regular and voluntary contributions you made to the fund, plus any interest payable. Hrblock taxcut If the refund includes only your contributions, none of the refund is taxable. Hrblock taxcut If it includes any interest, the interest is taxable unless you roll it over directly into another qualified plan or a traditional individual retirement arrangement (IRA). Hrblock taxcut If you do not have the Office of Personnel Management (OPM) transfer the interest to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. Hrblock taxcut See Rollover Rules in Part II for information on how to make a rollover. Hrblock taxcut Interest is not paid on contributions to the CSRS for service after 1956 unless your service was for more than 1 year but not more than 5 years. Hrblock taxcut Therefore, many employees who withdraw their contributions under the CSRS do not get interest and do not owe any tax on their refund. Hrblock taxcut If you do not roll over interest included in your refund, it may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. Hrblock taxcut If you separate from service before the calendar year in which you reach age 55, it may be subject to an additional 10% tax on early distributions. Hrblock taxcut For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575. Hrblock taxcut A lump-sum distribution is eligible for capital gain treatment or the 10-year tax option only if the plan participant was born before January 2, 1936. Hrblock taxcut Tax Withholding and Estimated Tax The CSRS or FERS annuity you receive is subject to federal income tax withholding, unless you choose not to have tax withheld. Hrblock taxcut OPM will tell you how to make the choice. Hrblock taxcut The choice for no withholding remains in effect until you change it. Hrblock taxcut These withholding rules also apply to a disability annuity, whether received before or after minimum retirement age. Hrblock taxcut If you choose not to have tax withheld, or if you do not have enough tax withheld, you may have to make estimated tax payments. Hrblock taxcut You may owe a penalty if the total of your withheld tax and estimated tax does not cover most of the tax shown on your return. Hrblock taxcut Generally, you will owe the penalty for 2014 if the additional tax you must pay with your return is $1,000 or more and more than 10% of the tax to be shown on your 2014 return. Hrblock taxcut For more information, including exceptions to the penalty, see chapter 4 of Publication 505, Tax Withholding and Estimated Tax. Hrblock taxcut Form CSA 1099R. Hrblock taxcut   Form CSA 1099R is mailed to you by OPM each year. Hrblock taxcut It will show any tax you had withheld. Hrblock taxcut File a copy of Form CSA 1099R with your tax return if any federal income tax was withheld. Hrblock taxcut    You also can view and download your Form CSA 1099R by visiting the OPM website at  www. Hrblock taxcut servicesonline. Hrblock taxcut opm. Hrblock taxcut gov. Hrblock taxcut To log in, you will need your retirement CSA claim number and your personal identification number. Hrblock taxcut Choosing no withholding on payments outside the United States. Hrblock taxcut   The choice for no withholding generally cannot be made for annuity payments to be delivered outside the United States and its possessions. Hrblock taxcut   To choose no withholding if you are a U. Hrblock taxcut S. Hrblock taxcut citizen or resident alien, you must provide OPM with your home address in the United States or its possessions. Hrblock taxcut Otherwise, OPM has to withhold tax. Hrblock taxcut For example, OPM must withhold if you provide a U. Hrblock taxcut S. Hrblock taxcut 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. Hrblock taxcut S. Hrblock taxcut home address. Hrblock taxcut   If you do not provide a home address in the United States or its possessions, you can choose not to have tax withheld only if you certify to OPM that you are not a U. Hrblock taxcut S. Hrblock taxcut citizen, a U. Hrblock taxcut S. Hrblock taxcut resident alien, or someone who left the United States to avoid tax. Hrblock taxcut But if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. Hrblock taxcut For details, see Publication 519, U. Hrblock taxcut S. Hrblock taxcut Tax Guide for Aliens. Hrblock taxcut Withholding certificate. Hrblock taxcut   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. Hrblock taxcut The amount of tax withheld depends on your marital status, the number of withholding allowances, and any additional amount you designate to be withheld. Hrblock taxcut If you do not make either of these choices, OPM must withhold as if you were married with three withholding allowances. Hrblock taxcut To change the amount of tax withholding or to stop withholding, call OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D. Hrblock taxcut C. Hrblock taxcut calling area must call 202-606-0500). Hrblock taxcut No special form is needed. Hrblock taxcut You will need your retirement CSA or CSF claim number, your social security number, and your personal identification number (PIN) when you call. Hrblock taxcut If you have TTY/TDD equipment, call 1-855–887–4957. Hrblock taxcut If you need a PIN, call OPM's Retirement Information Office. Hrblock taxcut You also can change the amount of withholding or stop withholding online by visiting the OPM website at www. Hrblock taxcut servicesonline. Hrblock taxcut opm. Hrblock taxcut gov. Hrblock taxcut You will need your retirement CSA or CSF claim number and your PIN. Hrblock taxcut Withholding from certain lump-sum payments. Hrblock taxcut   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. Hrblock taxcut Tax will be withheld at a 20% rate on the interest distributed. Hrblock taxcut However, tax will not be withheld if you have OPM transfer (roll over) the interest directly to your traditional IRA or other qualified plan. Hrblock taxcut If you have OPM transfer (roll over) the interest directly to a Roth IRA, the entire amount will be taxed in the current year. Hrblock taxcut Because no income tax will be withheld at the time of the transfer, you may want to increase your withholding or pay estimated taxes. Hrblock taxcut See Rollover Rules in Part II. Hrblock taxcut If you receive only your contributions, no tax will be withheld. Hrblock taxcut Withholding from Thrift Savings Plan payments. Hrblock taxcut   Generally, a distribution that you receive from the TSP is subject to federal income tax withholding. Hrblock taxcut The amount withheld is: 20% if the distribution is an eligible rollover distribution, 10% if it is a nonperiodic distribution other than an eligible rollover distribution, or An amount determined as if you were married with three withholding allowances, unless you submit a withholding certificate (Form W-4P), if it is a periodic distribution. Hrblock taxcut  However, you usually can choose not to have tax withheld from TSP payments other than eligible rollover distributions. Hrblock taxcut 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. Hrblock taxcut   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. Hrblock taxcut The above document is also available in the “Forms & Publications” section of the TSP website at www. Hrblock taxcut tsp. Hrblock taxcut gov. Hrblock taxcut Estimated tax. Hrblock taxcut   Generally, you must make estimated tax payments for 2014 if you expect to owe at least $1,000 in tax for 2014 (after subtracting your withholding and credits) and you expect your withholding and your credits to be less than the smaller of: 90% of the tax to be shown on your income tax return for 2014, or 100% of the tax shown on your 2013 income tax return (110% of that amount if the adjusted gross income shown on the return was more than $150,000 ($75,000 if your filing status for 2014 will be married filing separately)). Hrblock taxcut The return must cover all 12 months. Hrblock taxcut   You do not have to pay estimated tax for 2014 if you were a U. Hrblock taxcut S. Hrblock taxcut citizen or resident alien for all of 2013 and you had no tax liability for the full 12-month 2013 tax year. Hrblock taxcut   Publication 505 contains information that you can use to help you figure your estimated tax payments. Hrblock taxcut Filing Requirements If your gross income, including the taxable part of your annuity, is less than a certain amount, you generally do not have to file a federal income tax return for that year. Hrblock taxcut The gross income filing requirements for the tax year are in the instructions to Form 1040, 1040A, or 1040EZ. Hrblock taxcut Children. Hrblock taxcut   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. Hrblock taxcut   If your child can be claimed as a dependent, treat the taxable part of his or her annuity as unearned income when applying the filing requirements for dependents. Hrblock taxcut Form CSF 1099R. Hrblock taxcut   Form CSF 1099R will be mailed to you by January 31 after the end of each tax year. Hrblock taxcut It will show the total amount of the annuity you received in the past year. Hrblock taxcut It also should show, separately, the survivor annuity for a child or children. Hrblock taxcut Only the part that is each individual's survivor annuity should be shown on that individual's Form 1040 or 1040A. Hrblock taxcut   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. Hrblock taxcut    You also can view and download your Form CSF 1099R by visiting the OPM website at  www. Hrblock taxcut servicesonline. Hrblock taxcut opm. Hrblock taxcut gov. Hrblock taxcut To log in you will need your retirement CSF claim number and personal identification number. Hrblock taxcut    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. Hrblock taxcut C. Hrblock taxcut calling area must call 202-606-0500). Hrblock taxcut You will need your CSF claim number and your social security number when you call. Hrblock taxcut Taxable part of annuity. Hrblock taxcut   To find the taxable part of a retiree's annuity when applying the filing requirements, see the discussion in Part II, Rules for Retirees , or Part III, Rules for Disability Retirement and Credit for the Elderly or the Disabled , whichever applies. Hrblock taxcut To find the taxable part of each survivor annuity when applying the filing requirements, see the discussion in Part IV, Rules for Survivors of Federal Employees , or Part V, Rules for Survivors of Federal Retirees , whichever applies. Hrblock taxcut Part II Rules for Retirees This part of the publication is for retirees who retired on nondisability retirement. Hrblock taxcut If you retired on disability before you reached your minimum retirement age, see Part III, Rules for Disability Retirement and Credit for the Elderly or the Disabled. Hrblock taxcut However, on the day after you reach your minimum retirement age, use the rules in this section to report your disability retirement and begin recovering your cost. Hrblock taxcut Annuity statement. Hrblock taxcut   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). Hrblock taxcut You will use this information to figure the tax-free recovery of your cost. Hrblock taxcut Annuity starting date. Hrblock taxcut   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. Hrblock taxcut 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. Hrblock taxcut Gross monthly rate. Hrblock taxcut   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. Hrblock taxcut Your cost. Hrblock taxcut   Your monthly annuity payment contains an amount on which you have previously paid income tax. Hrblock taxcut This amount represents part of your contributions to the retirement plan. Hrblock taxcut 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. Hrblock taxcut   The cost of your annuity is the total of your contributions to the retirement plan, as shown on your annuity statement from OPM. Hrblock taxcut If you elected the alternative annuity option, it includes any deemed deposits and any deemed redeposits that were added to your lump-sum credit. Hrblock taxcut (See Lump-sum credit under Alternative Annuity Option, later. Hrblock taxcut )   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. Hrblock taxcut You cannot claim an interest deduction for any interest payments. Hrblock taxcut You cannot treat these payments as voluntary contributions; they are considered regular employee contributions. Hrblock taxcut Recovering your cost tax free. Hrblock taxcut   How you figure the tax-free recovery of the cost of your CSRS or FERS annuity depends on your annuity starting date. Hrblock taxcut If your annuity starting date is before July 2, 1986, either the Three-Year Rule or the General Rule (both discussed later) applies to your annuity. Hrblock taxcut If your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method (discussed later). Hrblock taxcut If your annuity starting date is after November 18, 1996, you must use the Simplified Method. Hrblock taxcut   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 (unless such payment is used for purposes discussed under Distributions Used To Pay Insurance Premiums for Public Safety Officers , later). Hrblock taxcut The tax-free part is a fixed dollar amount. Hrblock taxcut It remains the same, even if your annuity is increased. Hrblock taxcut Generally, this rule applies as long as you receive your annuity. Hrblock taxcut However, see Exclusion limit , later. Hrblock taxcut Choosing a survivor annuity after retirement. Hrblock taxcut    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. Hrblock taxcut   If you retired without a survivor annuity and report your annuity under the General Rule, you must figure the tax-free part of your annuity using a new exclusion percentage if you later choose a survivor annuity and take reduced annuity payments. Hrblock taxcut To figure the new exclusion percentage, reduce your cost by the amount you previously recovered tax free. Hrblock taxcut Figure the expected return as of the date the reduced annuity begins. Hrblock taxcut For details on the General Rule, see Publication 939. Hrblock taxcut Canceling a survivor annuity after retirement. Hrblock taxcut   If you retired with a survivor annuity payable to your spouse upon your death and you notify OPM that your marriage has ended, your annuity might be increased to remove the reduction for a survivor benefit. Hrblock taxcut The increased annuity does not change the cost recovery you figured at the annuity starting date. Hrblock taxcut The tax-free part of each annuity payment remains the same. Hrblock taxcut    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. Hrblock taxcut C. Hrblock taxcut calling area must call 202-606-0500). Hrblock taxcut Exclusion limit. Hrblock taxcut   Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years. Hrblock taxcut Annuity starting date after 1986. Hrblock taxcut   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 cannot exceed your total cost. Hrblock taxcut Annuity payments you or your survivors receive after the total cost in the plan has been recovered are generally fully taxable. Hrblock taxcut Example. Hrblock taxcut Your annuity starting date is after 1986 and you exclude $100 a month under the Simplified Method. Hrblock taxcut If your cost is $12,000, the exclusion ends after 10 years (120 months). Hrblock taxcut Thereafter, your entire annuity is generally fully taxable. Hrblock taxcut Annuity starting date before 1987. Hrblock taxcut   If your annuity starting date is before 1987, you can continue to take your monthly exclusion figured under the General Rule or Simplified Method for as long as you receive your annuity. Hrblock taxcut If you chose a joint and survivor annuity, your survivor can continue to take that same exclusion. Hrblock taxcut The total exclusion may be more than your cost. Hrblock taxcut Deduction of unrecovered cost. Hrblock taxcut   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. Hrblock taxcut 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). Hrblock taxcut If your annuity starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost at death. Hrblock taxcut Simplified Method If your annuity starting date is after November 18, 1996, you must use the Simplified Method to figure the tax-free part of your CSRS or FERS annuity. Hrblock taxcut (OPM has figured the taxable amount of your annuity shown on your Form CSA 1099R using the Simplified Method. Hrblock taxcut ) You could have chosen to use either the Simplified Method or the General Rule if your annuity starting date is after July 1, 1986, but before November 19, 1996. Hrblock taxcut The Simplified Method does not apply if your annuity starting date is before July 2, 1986. Hrblock taxcut Under the Simplified Method, you figure the tax-free part of each full monthly payment by dividing your cost by a number of months based on your age. Hrblock taxcut This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Hrblock taxcut If your annuity starting date is after 1997 and your annuity includes a survivor benefit for your spouse, this number is based on your combined ages. Hrblock taxcut Worksheet A. Hrblock taxcut   Use Worksheet A. Hrblock taxcut Simplified Method (near the end of this publication), to figure your taxable annuity. Hrblock taxcut Be sure to keep the completed worksheet. Hrblock taxcut It will help you figure your taxable amounts for later years. Hrblock taxcut Instead of Worksheet A, you generally can use the Simplified Method Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR to figure your taxable annuity. Hrblock taxcut However, you must use Worksheet A and Worksheet B in this publication if you chose the alternative annuity option, discussed later. Hrblock taxcut Line 2. Hrblock taxcut   See Your cost , earlier, for an explanation of your cost in the plan. Hrblock taxcut 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. Hrblock taxcut Line 3. Hrblock taxcut   The number you enter on line 3 is the appropriate number from Table 1 or 2 representing approximate life expectancies in months. Hrblock taxcut If your annuity starting date is after 1997, use: Table 1 for an annuity without a survivor benefit, or Table 2 for an annuity with a survivor benefit. Hrblock taxcut If your annuity starting date is before 1998, use Table 1. Hrblock taxcut Line 6. Hrblock taxcut   If you received contributions tax free before 2013, 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. Hrblock taxcut If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, this amount includes the tax-free part of the lump-sum payment you received. Hrblock taxcut Example. Hrblock taxcut Bill Smith retired from the Federal Government on March 31, 2013, under an annuity that will provide a survivor benefit for his wife, Kathy. Hrblock taxcut His annuity starting date is April 1, 2013, the annuity is paid in arrears, and he received his first monthly annuity payment on May 1, 2013. Hrblock taxcut He must use the Simplified Method to figure the tax-free part of his annuity benefits. Hrblock taxcut Bill's monthly annuity benefit is $1,000. Hrblock taxcut He had contributed $31,000 to his retirement plan and had received no distributions before his annuity starting date. Hrblock taxcut At his annuity starting date, he was 65 and Kathy was 57. Hrblock taxcut Bill's completed Worksheet A is shown later. Hrblock taxcut To complete line 3, he used Table 2 at the bottom of the worksheet and found that 310 is the number in the second column opposite the age range that includes 122 (his and Kathy's combined ages). Hrblock taxcut Bill keeps a copy of the completed worksheet for his records. Hrblock taxcut It will help him (and Kathy, if she survives him) figure the taxable amount of the annuity in later years. Hrblock taxcut Bill's tax-free monthly amount is $100. Hrblock taxcut (See line 4 of the worksheet. Hrblock taxcut ) If he lives to collect more than 310 monthly payments, he will generally have to include in his gross income the full amount of any annuity payments received after 310 payments have been made. Hrblock taxcut If Bill does not live to collect 310 monthly payments and his wife begins to receive monthly payments, she also will exclude $100 from each monthly payment until 310 payments (Bill's and hers) have been collected. Hrblock taxcut If she dies before 310 payments have been made, a miscellaneous itemized deduction (not subject to the 2%-of-adjusted- gross-income limit) will be allowed for the unrecovered cost on her final income tax return. Hrblock taxcut General Rule If your annuity starting date is after November 18, 1996, you cannot use the General Rule to figure the tax-free part of your CSRS or FERS annuity. Hrblock taxcut If your annuity starting date is after July 1, 1986, but before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Hrblock taxcut If your annuity starting date is before July 2, 1986, you could have chosen to use the General Rule only if you could not use the Three-Year Rule. Hrblock taxcut Under the General Rule, you figure the tax-free part of each full monthly payment by multiplying the initial gross monthly rate of your annuity by an exclusion percentage. Hrblock taxcut Figuring this percentage is complex and requires the use of actuarial tables. Hrblock taxcut For these tables and other information about using the General Rule, see Publication 939. Hrblock taxcut Three-Year Rule If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the Three-Year Rule. Hrblock taxcut Under this rule, you excluded all the annuity payments from income until you fully recovered your cost. Hrblock taxcut After your cost was recovered, all payments became fully taxable. Hrblock taxcut You cannot use another rule to again exclude amounts from income. Hrblock taxcut The Three-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986. Hrblock taxcut Worksheet A. Hrblock taxcut Simplified Method for Bill Smith See the instructions in Part II of this publication under Simplified Method. Hrblock taxcut 1. Hrblock taxcut Enter the total pension or annuity payments received this year. Hrblock taxcut Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Hrblock taxcut $ 8,000 2. Hrblock taxcut Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion*. Hrblock taxcut See Your cost in Part II, Rules for Retirees, earlier 2. Hrblock taxcut 31,000 Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Hrblock taxcut Otherwise, go to line 3. Hrblock taxcut   3. Hrblock taxcut Enter the appropriate number from Table 1 below. Hrblock taxcut But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below. Hrblock taxcut 3. Hrblock taxcut 310 4. Hrblock taxcut Divide line 2 by the number on line 3 4. Hrblock taxcut 100 5. Hrblock taxcut Multiply line 4 by the number of months for which this year's payments were made. Hrblock taxcut If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Hrblock taxcut Otherwise, go to line 6 5. Hrblock taxcut 800 6. Hrblock taxcut Enter any amounts previously recovered tax free in years after 1986. Hrblock taxcut This is the amount shown on line 10 of your worksheet for last year 6. Hrblock taxcut 0 7. Hrblock taxcut Subtract line 6 from line 2 7. Hrblock taxcut 31,000 8. Hrblock taxcut Enter the smaller of line 5 or line 7 8. Hrblock taxcut 800 9. Hrblock taxcut Taxable amount for year. Hrblock taxcut Subtract line 8 from line 1. Hrblock taxcut Enter the result, but not less than zero. Hrblock taxcut Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. Hrblock taxcut If you are a nonresident alien, also enter this amount on line 1 of Worksheet C. Hrblock taxcut If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount figured on this line instead. Hrblock taxcut If you are a retired public safety officer, see Distributions Used To Pay Insurance Premiums for Public Safety Officers in Part II before entering an amount on your tax return or Worksheet C, line 1 9. Hrblock taxcut $7,200 10. Hrblock taxcut Was your annuity starting date before 1987?   Yes. Hrblock taxcut Do not complete the rest of this worksheet. Hrblock taxcut    No. Hrblock taxcut Add lines 6 and 8. Hrblock taxcut This is the amount you have recovered tax free through 2013. Hrblock taxcut You will need this number if you need to fill out this worksheet next year 10. Hrblock taxcut 800 11. Hrblock taxcut Balance of cost to be recovered. Hrblock taxcut Subtract line 10 from line 2. Hrblock taxcut If zero, you will not have to complete this worksheet next year. Hrblock taxcut The payments you receive next year will generally be fully taxable 11. Hrblock taxcut $30,200 Table 1 for Line 3 Above    IF your age on your  annuity starting date was   AND your annuity starting date was—     before November 19, 1996,  THEN enter on line 3 after November 18, 1996,  THEN enter on line 3   55 or under 300 360   56–60 260 310   61–65 240 260   66–70 170 210   71 or over 120 160  Table 2 for Line 3 Above    IF the annuitants' combined ages on your annuity starting date were   THEN enter on line 3         110 or under   410         111–120   360         121–130   310         131–140   260         141 or over   210       * A death benefit exclusion of up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. Hrblock taxcut Alternative Annuity Option If you are eligible, you may choose an alternative form of annuity. Hrblock taxcut If you make this choice, you will receive a lump-sum payment equal to your contributions to the plan and a reduced monthly annuity. Hrblock taxcut You are eligible to make this choice if you meet all of the following requirements. Hrblock taxcut You are retiring, but not on disability. Hrblock taxcut You have a life-threatening illness or other critical medical condition. Hrblock taxcut You do not have a former spouse entitled to court ordered benefits based on your service. Hrblock taxcut If you are not eligible or do not choose this alternative annuity, you can skip the following discussion and go to Federal Gift Tax , later. Hrblock taxcut Lump-Sum Payment The lump-sum payment you receive under the alternative annuity option generally has a tax-free part and a taxable part. Hrblock taxcut The tax-free part represents part of your cost. Hrblock taxcut The taxable part represents part of the earnings on your annuity contract. Hrblock taxcut Your lump-sum credit (discussed later) may include a deemed deposit or redeposit that is treated as being included in your lump-sum payment even though you do not actually receive such amounts. Hrblock taxcut Deemed deposits and redeposits, which are described later under Lump-sum credit , are taxable to you in the year of retirement. Hrblock taxcut Your taxable amount may therefore be more than the lump-sum payment you receive. Hrblock taxcut You must include the taxable part of the lump-sum payment in your income for the year you receive the payment unless you roll it over into another qualified plan or an IRA. Hrblock taxcut If you do not have OPM transfer the taxable amount to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. Hrblock taxcut See Rollover Rules , later, for information on how to make a rollover. Hrblock taxcut OPM can make a direct rollover only up to the amount of the lump-sum payment. Hrblock taxcut Therefore, to defer tax on the full taxable amount if it is more than the payment, you must add funds from another source. Hrblock taxcut The taxable part of the lump-sum payment does not qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. Hrblock taxcut 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, even if you reach age 55 in the year you receive the lump-sum payment. Hrblock taxcut For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575. Hrblock taxcut Worksheet B. Hrblock taxcut   Use Worksheet B. Hrblock taxcut Lump-Sum Payment (near the end of this publication), to figure the taxable part of your lump-sum payment. Hrblock taxcut Be sure to keep the completed worksheet for your records. Hrblock taxcut   To complete the worksheet, you will need to know the amount of your lump-sum credit and the present value of your annuity contract. Hrblock taxcut Lump-sum credit. Hrblock taxcut   Generally, this is the same amount as the lump-sum payment you receive (the total of your contributions to the retirement system). Hrblock taxcut 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. Hrblock taxcut Deemed deposits (including interest) are for federal employment during which no retirement contributions were taken out of your pay. Hrblock taxcut Deemed redeposits (including interest) are for any refunds of retirement contributions that you received and did not repay. Hrblock taxcut 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. Hrblock taxcut Present value of your annuity contract. Hrblock taxcut   The present value of your annuity contract is figured using actuarial tables provided by the IRS. Hrblock taxcut If you are receiving a lump-sum payment under the Alternative Annuity Option, you can write to the address below to find out the present value of your annuity contract. Hrblock taxcut Internal Revenue Service Attn: Actuarial Group 2 TE/GE SE:T:EP:RA:T:A2 NCA-629 1111 Constitution Ave. Hrblock taxcut , NW Washington, DC 20224-0002 Example. Hrblock taxcut David Brown retired from the federal government in 2013, one month after his 55th birthday. Hrblock taxcut He had contributed $31,000 to his retirement plan and chose to receive a lump-sum payment of that amount under the alternative annuity option. Hrblock taxcut The present value of his annuity contract was $155,000. Hrblock taxcut The tax-free part and the taxable part of the lump-sum payment are figured using Worksheet B, as shown below. Hrblock taxcut The taxable part ($24,800) is also his net cost in the plan, which is used to figure the taxable part of his reduced annuity payments. Hrblock taxcut See Reduced Annuity , later. Hrblock taxcut Worksheet B. Hrblock taxcut Lump-Sum Payment for David Brown See the instructions in Part II of this publication under Alternative Annuity Option . Hrblock taxcut  1. Hrblock taxcut Enter your lump-sum credit (your cost in the plan at the annuity starting date) 1. Hrblock taxcut $ 31,000 2. Hrblock taxcut Enter the present value of your annuity contract 2. Hrblock taxcut 155,000 3. Hrblock taxcut Divide line 1 by line 2 3. Hrblock taxcut . Hrblock taxcut 20 4. Hrblock taxcut Tax-free amount. Hrblock taxcut Multiply line 1 by line 3. Hrblock taxcut (Caution: Do not include this amount on line 6 of Worksheet A in this publication. Hrblock taxcut ) 4. Hrblock taxcut $6,200 5. Hrblock taxcut Taxable amount (net cost in the plan). Hrblock taxcut Subtract line 4 from line 1. Hrblock taxcut Include this amount in the total on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Hrblock taxcut Also, enter this amount on line 2 of Worksheet A in this publication. Hrblock taxcut 5. Hrblock taxcut $24,800   Lump-sum payment in installments. Hrblock taxcut   If you choose the alternative annuity option, you usually will receive the lump-sum payment in two equal installments. Hrblock taxcut You will receive the first installment after you make the choice upon retirement. Hrblock taxcut The second installment will be paid to you, with interest, in the next calendar year. Hrblock taxcut (Exceptions to the installment rule are provided for cases of critical medical need. Hrblock taxcut )   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. Hrblock taxcut If the payment has a tax-free part, you must treat the taxable part as received first. Hrblock taxcut How to report. Hrblock taxcut   Add any actual or deemed payment of your lump-sum credit (defined earlier) to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Hrblock taxcut Add the taxable part to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b, unless you roll over the taxable part to your traditional IRA or a qualified retirement plan. Hrblock taxcut    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, or on line 9a of Form 1040NR. Hrblock taxcut Reduced Annuity If you have chosen to receive a lump-sum payment under the alternative annuity option, you also will receive reduced monthly annuity payments. Hrblock taxcut These annuity payments each will have a tax-free and a taxable part. Hrblock taxcut To figure the tax-free part of each annuity payment, you must use the Simplified Method (Worksheet A). Hrblock taxcut For instructions on how to complete the worksheet, see Worksheet A under Simplified Method, earlier. Hrblock taxcut To complete Worksheet A, line 2, you must reduce your cost in the plan by the tax-free part of the lump-sum payment you received. Hrblock taxcut Enter as your net cost on line 2 the amount from Worksheet B, line 5. Hrblock taxcut Do not include the tax-free part of the lump-sum payment with other amounts recovered tax free (Worksheet A, line 6) when limiting your total exclusion to your total cost. Hrblock taxcut Example. Hrblock taxcut The facts are the same as in the example for David Brown in the preceding discussion. Hrblock taxcut In addition, David received 10 annuity payments in 2013 of $1,200 each. Hrblock taxcut Using Worksheet A, he figures the taxable part of his annuity payments. Hrblock taxcut He completes line 2 by reducing his $31,000 cost by the $6,200 tax-free part of his lump-sum payment. Hrblock taxcut His entry on line 2 is his $24,800 net cost in the plan (the amount from Worksheet B, line 5). Hrblock taxcut He does not include the tax-free part of his lump-sum payment on Worksheet A, line 6. Hrblock taxcut David's filled-in Worksheet A is shown on the next page. Hrblock taxcut Worksheet A. Hrblock taxcut Simplified Method for David Brown See the instructions in Part II of this publication under Simplified Method . Hrblock taxcut 1. Hrblock taxcut Enter the total pension or annuity payments received this year. Hrblock taxcut Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. Hrblock taxcut $ 12,000 2. Hrblock taxcut Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion*. Hrblock taxcut See Your cost in Part II, Rules for Retirees, earlier 2. Hrblock taxcut 24,800 Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Hrblock taxcut Otherwise, go to line 3. Hrblock taxcut   3. Hrblock taxcut Enter the appropriate number from Table 1 below. Hrblock taxcut But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below. Hrblock taxcut 3. Hrblock taxcut 360 4. Hrblock taxcut Divide line 2 by the number on line 3 4. Hrblock taxcut 68. Hrblock taxcut 89 5. Hrblock taxcut Multiply line 4 by the number of months for which this year's payments were made. Hrblock taxcut If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Hrblock taxcut Otherwise, go to line 6 5. Hrblock taxcut 688. Hrblock taxcut 90 6. Hrblock taxcut Enter any amounts previously recovered tax free in years after 1986. Hrblock taxcut This is the amount shown on line 10 of your worksheet for last year 6. Hrblock taxcut 0 7. Hrblock taxcut Subtract line 6 from line 2 7. Hrblock taxcut 24,800 8. Hrblock taxcut Enter the smaller of line 5 or line 7 8. Hrblock taxcut 688. Hrblock taxcut 90 9. Hrblock taxcut Taxable amount for year. Hrblock taxcut Subtract line 8 from line 1. Hrblock taxcut Enter the result, but not less than zero. Hrblock taxcut Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. Hrblock taxcut If you are a nonresident alien, also enter this amount on line 1 of Worksheet C. Hrblock taxcut If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount figured on this line instead. Hrblock taxcut If you are a retired public safety officer, see Distributions Used To Pay Insurance Premiums for Public Safety Officers in Part II before entering an amount on your tax return or Worksheet C, line 1 9. Hrblock taxcut $11,311. Hrblock taxcut 10 10. Hrblock taxcut Was your annuity starting date before 1987?   Yes. Hrblock taxcut Do not complete the rest of this worksheet. Hrblock taxcut    No. Hrblock taxcut Add lines 6 and 8. Hrblock taxcut This is the amount you have recovered tax free through 2013. Hrblock taxcut You will need this number if you need to fill out this worksheet next year 10. Hrblock taxcut 688. Hrblock taxcut 90 11. Hrblock taxcut Balance of cost to be recovered. Hrblock taxcut Subtract line 10 from line 2. Hrblock taxcut If zero, you will not have to complete this worksheet next year. Hrblock taxcut The payments you receive next year will generally be fully taxable 11. Hrblock taxcut $24,111. Hrblock taxcut 10 Table 1 for Line 3 Above    IF your age on your annuity starting date was   AND your annuity starting date was—     before November 19, 1996,  THEN enter on line 3 after November 18, 1996,  THEN enter on line 3   55 or under 300 360   56–60 260 310   61–65 240 260   66–70 170 210   71 or over 120 160  Table 2 for Line 3 Above    IF the annuitants' combined ages on your annuity starting date were   THEN enter on line 3         110 or under   410         111–120   360         121–130   310         131–140   260         141 or over   210       * A death benefit exclusion of up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996. Hrblock taxcut Reemployment after choosing the alternative annuity option. Hrblock taxcut If you chose this option when you retired and then you were reemployed by the Federal Government before retiring again, your Form CSA 1099R may show only the amount of your contributions to your retirement plan during your reemployment. Hrblock taxcut If the amount on the form does not include all your contributions, disregard it and use your total contributions to figure the taxable part of your annuity payments. Hrblock taxcut Annuity starting date before November 19, 1996. Hrblock taxcut   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. Hrblock taxcut Under those rules, you do not reduce your cost in the plan (Worksheet A, line 2) by the tax-free part of the lump-sum payment. Hrblock taxcut However, you must include that tax-free amount with other amounts previously recovered tax free (Worksheet A, line 6) when limiting your total exclusion to your total cost. Hrblock taxcut Federal Gift Tax If, through the exercise or nonexercise of an election or option, you provide an annuity for your beneficiary at or after your death, you have made a gift. Hrblock taxcut The gift may be taxable for gift tax purposes. Hrblock taxcut The value of the gift is equal to the value of the annuity. Hrblock taxcut Joint and survivor annuity. Hrblock taxcut   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. Hrblock taxcut This will eliminate any gift tax liability with regard to that gift. Hrblock taxcut   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. Hrblock taxcut This may result in a taxable gift. Hrblock taxcut More information. Hrblock taxcut   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. Hrblock taxcut Retirement During the Past Year If you have recently retired, the following discussions covering annual leave, voluntary contributions, and community property may apply to you. Hrblock taxcut Annual leave. Hrblock taxcut   A payment for accrued annual leave received on retirement is a salary payment. Hrblock taxcut It is taxable as wages in the tax year you receive it. Hrblock taxcut Voluntary contributions. Hrblock taxcut   Voluntary contributions to the retirement fund are those made in addition to the regular contributions that were deducted from your salary. Hrblock taxcut 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. Hrblock taxcut Voluntary contributions are not the same as employee contributions to the Thrift Savings Plan. Hrblock taxcut See Thrift Savings Plan , later. Hrblock taxcut Additional annuity benefit. Hrblock taxcut   If you choose to receive 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. Hrblock taxcut This separate treatment applies for figuring the amounts to be excluded from, and included in, gross income. Hrblock taxcut It does not matter that you receive only one monthly check covering both benefits. Hrblock taxcut 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. Hrblock taxcut   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. Hrblock taxcut Refund of voluntary contributions. Hrblock taxcut   If you choose to receive 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. Hrblock taxcut 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. Hrblock taxcut See Rollover Rules , later. Hrblock taxcut The interest does not qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. Hrblock taxcut 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. Hrblock taxcut For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575. Hrblock taxcut Community property laws. Hrblock taxcut   State community property laws apply to your annuity. Hrblock taxcut These laws will affect your income tax only if you file a return separately from your spouse. Hrblock taxcut   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. Hrblock taxcut 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. Hrblock taxcut   At any time, you have only one domicile even though you may have more than one home. Hrblock taxcut Your domicile is your fixed and permanent legal home that you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. Hrblock taxcut The question of your domicile is mainly a matter of your intentions as indicated by your actions. Hrblock taxcut   If your annuity is a mixture of community income and separate income, you must divide it between the two kinds of income. Hrblock taxcut The division is based on your periods of service and domicile in community and noncommunity property states while you were married. Hrblock taxcut   For more information, see Publication 555, Community Property. Hrblock taxcut Reemployment After Retirement If you retired from federal service and are later rehired by the Federal Government as an employee, you can continue to receive your annuity during reemployment. Hrblock taxcut The employing agency usually will pay you the difference between your salary for your period of reemployment and your annuity. Hrblock taxcut This amount is taxable as wages. Hrblock taxcut Your annuity will continue to be taxed just as it was before. Hrblock taxcut If you are still recovering your cost, you continue to do so. Hrblock taxcut If you have recovered your cost, the annuity you receive while you are reemployed generally is fully taxable. Hrblock taxcut Nonresident Aliens The following special rules apply to nonresident alien federal employees performing services outside the United States and to nonresident alien retirees and beneficiaries. Hrblock taxcut A nonresident alien is an individual who is not a citizen or a resident alien of the United States. Hrblock taxcut Special rule for figuring your total contributions. Hrblock taxcut   Your contributions to the retirement plan (your cost) also include the government's contributions to the plan to a certain extent. Hrblock taxcut 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. Hrblock taxcut For example, government contributions would not have been taxable to you if, at the time made, your services were performed outside the United States. Hrblock taxcut Thus, your cost is increased by these government contributions and the benefits that you, or your beneficiary, must include in income are reduced. Hrblock taxcut   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 a resident alien of the United States. Hrblock taxcut Limit on taxable amount. Hrblock taxcut   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. Hrblock taxcut Figure this limited taxable amount by multiplying the otherwise taxable amount by a fraction. Hrblock taxcut The numerator of the fraction is the retiree's total U. Hrblock taxcut S. Hrblock taxcut Government basic pay, other than tax-exempt pay for services performed outside the United States. Hrblock taxcut The denominator is the retiree's total U. Hrblock taxcut S. Hrblock taxcut Government basic pay for all services. Hrblock taxcut    Basic pay includes regular pay plus any standby differential. Hrblock taxcut It does not include bonuses, overtime pay, certain retroactive pay, uniform or other allowances, or lump-sum leave payments. Hrblock taxcut   To figure the limited taxable amount of your CSRS or FERS annuity or your TSP distributions, use Worksheet C. Hrblock taxcut (For an annuity, first complete Worksheet A in this publication. Hrblock taxcut ) Worksheet C. Hrblock taxcut Limited Taxable Amount for Nonresident Alien 1. Hrblock taxcut Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A or from Forms CSA 1099R or CSF 1099R) or TSP distributions (from Form 1099R) 1. Hrblock taxcut   2. Hrblock taxcut Enter the total U. Hrblock taxcut S. Hrblock taxcut Government basic pay other than tax-exempt pay for services performed outside the United States 2. Hrblock taxcut   3. Hrblock taxcut Enter the total U. Hrblock taxcut S. Hrblock taxcut Government basic pay for all services 3. Hrblock taxcut   4. Hrblock taxcut Divide line 2 by line 3 4. Hrblock taxcut   5. Hrblock taxcut Limited taxable amount. Hrblock taxcut Multiply line 1 by line 4. Hrblock taxcut Enter this amount on Form 1040NR, line 17b 5. Hrblock taxcut   Example 1. Hrblock taxcut You are a nonresident alien who performed all services for the U. Hrblock taxcut S. Hrblock taxcut Government abroad as a nonresident alien. Hrblock taxcut You retired and began to receive a monthly annuity of $200. Hrblock taxcut Your total basic pay for all services for the U. Hrblock taxcut S. Hrblock taxcut Government was $100,000. Hrblock taxcut All of your basic pay was tax exempt because it was not U. Hrblock taxcut S. Hrblock taxcut source income. Hrblock taxcut The taxable amount of your annuity using Worksheet A in this publication is $720. Hrblock taxcut You are a nonresident alien, so you figure the limited taxable amount of your annuity using Worksheet C as follows. Hrblock taxcut Worksheet C. Hrblock taxcut Limited Taxable Amount for Nonresident Alien — Example 1 1. Hrblock taxcut Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A or from Forms CSA 1099R or CSF 1099R) or TSP distributions (from Form 1099R) 1. Hrblock taxcut $ 720 2. Hrblock taxcut Enter the total U. Hrblock taxcut S. Hrblock taxcut Government basic pay other than tax-exempt pay for services performed outside the United States 2. Hrblock taxcut 0 3. Hrblock taxcut Enter the total U. Hrblock taxcut S. Hrblock taxcut Government basic pay for all services 3. Hrblock taxcut 100,000 4. Hrblock taxcut Divide line 2 by line 3 4. Hrblock taxcut 0 5. Hrblock taxcut Limited taxable amount. Hrblock taxcut Multiply line 1 by line 4. Hrblock taxcut Enter this amount on Form 1040NR, line 17b 5. Hrblock taxcut 0 Example 2. Hrblock taxcut You are a nonresident alien who performed services for the U. Hrblock taxcut S. Hrblock taxcut Government as a nonresident alien both within the United States and abroad. Hrblock taxcut You retired and began to receive a monthly annuity of $240. Hrblock taxcut Your total basic pay for your services for the U. Hrblock taxcut S. Hrblock taxcut Government was $120,000; $40,000 was for work done in the United States and $80,000 was for your work done in a foreign country. Hrblock taxcut The part of your total basic pay for your work done in a foreign country was tax exempt because it was not U. Hrblock taxcut S. Hrblock taxcut source income. Hrblock taxcut The taxable amount of your annuity figured using Worksheet A in this publication is $1,980. Hrblock taxcut You are a nonresident alien, so you figure the limited taxable amount of your annuity using Worksheet C as follows. Hrblock taxcut Worksheet C. Hrblock taxcut Limited Taxable Amount for Nonresident Alien — Example 2 1. Hrblock taxcut Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A or from Forms CSA 1099R or CSF 1099R) or TSP distributions (from Form 1099R) 1. Hrblock taxcut $ 1,980 2. Hrblock taxcut Enter the total U. Hrblock taxcut S. Hrblock taxcut Government basic pay other than tax-exempt pay for services performed outside the United States 2. Hrblock taxcut 40,000 3. Hrblock taxcut Enter the total U. Hrblock taxcut S. Hrblock taxcut Government basic pay for all services 3. Hrblock taxcut 120,000 4. Hrblock taxcut Divide line 2 by line 3 4. Hrblock taxcut . Hrblock taxcut 333 5. Hrblock taxcut Limited taxable amount. Hrblock taxcut Multiply line 1 by line 4. Hrblock taxcut Enter this amount on Form 1040NR, line 17b 5. Hrblock taxcut 659 Thrift Savings Plan Generally, all of the money in your TSP account is taxed as ordinary income when you receive it. Hrblock taxcut (However, see Roth TSP balance and Uniformed services TSP accounts, next. Hrblock taxcut ) This is because neither the contributions to your traditional TSP balance nor its earnings have been included previously in your taxable income. Hrblock taxcut The way that you withdraw your account balance determines when you must pay the tax. Hrblock taxcut Roth TSP balance. Hrblock taxcut   The TSP also offers a Roth TSP option, which allows you to make after-tax contributions into your TSP account. Hrblock taxcut This means Roth TSP contributions are included in your income. Hrblock taxcut The contribution limits are the same as the traditional TSP. Hrblock taxcut You can elect to have part or all of your TSP contributions designated as a Roth TSP. Hrblock taxcut Agency contributions will be part of your traditional TSP balance. Hrblock taxcut Also, you cannot roll over any portion of your traditional TSP into your Roth TSP. Hrblock taxcut   Qualified distributions from your Roth TSP are not included in income. Hrblock taxcut This applies to both your cost in the account and income earned on that account. Hrblock taxcut A qualified distribution is generally a distribution that is: Made after a 5-tax-year period of participation, and Made on or after the date you reach age 59½, made to a beneficiary or your estate on or after your death, or attributable to your being disabled. Hrblock taxcut   For more information, go to the TSP website, www. Hrblock taxcut tsp. Hrblock taxcut gov, or the TSP Service Office. Hrblock taxcut See Publication 575, Pension and Annuity Income, for more information about designated Roth accounts. Hrblock taxcut Uniformed services TSP accounts. Hrblock taxcut   If you have a uniformed services TSP account that includes contributions from combat zone pay, the distributions attributable to those contributions are tax exempt. Hrblock taxcut However, any earnings on those contributions to a traditional TSP balance are subject to tax when they are distributed. Hrblock taxcut See Roth TSP balance discussed previously to get more information about Roth contributions. Hrblock taxcut The statement you receive from the TSP will separately state the total amount of your distribution and the amount of your taxable distribution for the year. Hrblock taxcut You can get more information from the TSP website, www. Hrblock taxcut tsp. Hrblock taxcut gov, or the TSP Service Office. Hrblock taxcut Direct rollover by the TSP. Hrblock taxcut   If you ask the TSP to transfer any part of the money in your account, from traditional contributions and its earnings, 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. Hrblock taxcut However, see the following Note for a discussion on direct rollovers by the TSP of Roth contributions and its earnings. Hrblock taxcut Also, see Rollover Rules , later. Hrblock taxcut Direct rollover by the TSP to a Roth IRA. Hrblock taxcut   If you ask the TSP to transfer any part of the money in your account, from traditional contributions and its earnings, to a Roth IRA, the amount transferred will be taxed in the current year. Hrblock taxcut However, see the following Note for a discussion on direct rollovers by the TSP of Roth contributions and its earnings. Hrblock taxcut Also, see Rollovers to Roth IRAs for more information, later. Hrblock taxcut Note. Hrblock taxcut A direct rollover of your Roth contributions and its earnings (if certain conditions are met, see Roth TSP balance , earlier) in your TSP account to a Roth 401(k), Roth 403(b), Roth 457(b), or Roth IRA are not subject to tax when they are transferred or when you receive payments from those accounts at a later date. Hrblock taxcut This is because you already paid tax on those contributions. Hrblock taxcut You cannot rollover Roth contributions and its earnings in your TSP account to a traditional IRA. Hrblock taxcut TSP annuity. Hrblock taxcut   If you ask the TSP to buy an annuity with the money in your account, from traditional contributions and its earnings, the annuity payments are taxed when you receive them. Hrblock taxcut The payments are not subject to the additional 10% tax on early distributions, even if you are under age 55 when they begin. Hrblock taxcut However, there is no tax on the annuity payments if the annuity is purchased using the money in your account from Roth contributions and its earnings if certain conditions are met. Hrblock taxcut See Roth TSP balance , earlier. Hrblock taxcut This is because you already paid tax on those contributions. Hrblock taxcut Cash withdrawals. Hrblock taxcut   If you withdraw any of the money in your TSP account, from traditional contributions and its earnings, it is generally taxed as ordinary income when you receive it unless you roll it over into a traditional IRA or other qualified plan. Hrblock taxcut (See Rollover Rules , later. Hrblock taxcut ) 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. Hrblock taxcut See Lump-Sum Distributions in Publication 575 for details. Hrblock taxcut However, there is no tax if you withdraw money in your TSP account from Roth contributions and its earnings if certain conditions are met. Hrblock taxcut See Roth TSP balance , earlier. Hrblock taxcut    To qualify for the 10-year tax option, the plan participant must have been born before January 2, 1936. Hrblock taxcut   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. Hrblock taxcut 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 as if you are married with three withholding allowances, unless you submit a withholding certificate. Hrblock taxcut See also Withholding from Thrift Savings Plan payments earlier under Tax Withholding and Estimated Tax in Part I. Hrblock taxcut However, there is no withholding requirement for amounts withdrawn from your TSP account that is from Roth contributions and its earnings, if certain conditions are met. Hrblock taxcut See Roth TSP balance , earlier, for a discussion of those conditions. Hrblock taxcut Tax on early distributions. Hrblock taxcut   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. Hrblock taxcut However, this additional tax does not apply in certain situations, including any of the following. Hrblock taxcut You receive the distribution and separate from government service during or after the calendar year in which you reach age 55. Hrblock taxcut You choose to receive your account balance in monthly payments based on your life expectancy. Hrblock taxcut You are totally and permanently disabled. Hrblock taxcut You receive amounts from your Roth contributions since that represents a return of your cost (after-tax money). Hrblock taxcut The earnings may be subject to the 10% tax depending on whether you met certain conditions. Hrblock taxcut See Roth TSP balance , earlier. Hrblock taxcut   For more information, see Tax on Early Distributions in Publication 575. Hrblock taxcut Outstanding loan. Hrblock taxcut   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), from traditional contributions and its earnings, is taxed in the year declared. Hrblock taxcut The distribution also may be subject to the additional 10% tax on early distributions. Hrblock taxcut 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. Hrblock taxcut See Rollover Rules , later. Hrblock taxcut   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. Hrblock taxcut However, no withholding is required for portions of the distribution that is from Roth contributions and its earnings, if certain conditions are met. Hrblock taxcut See Roth TSP balance , earlier. Hrblock taxcut More information. Hrblock taxcut   For more information about the TSP, see Summary of the Thrift Savings Plan, distributed to all federal employees. Hrblock taxcut Also, see Important Tax Information About Payments From Your TSP Account and Special Tax Withholding Rules for Thrift Savings Plan Payments to Nonresident Aliens, which are available from your agency personnel office or from the TSP by calling 1-TSP-YOU-FIRST (1-877-968-3778) and for participants who are deaf, hard of hearing, or have a speech disability, call 1-TSP-THRIFT5 (1-877-847-4385). Hrblock taxcut    The above documents are also available on the TSP website at www. Hrblock taxcut tsp. Hrblock taxcut gov. Hrblock taxcut Select “Forms & Publications. Hrblock taxcut ” Rollover Rules Generally, a rollover is a tax-free withdrawal of cash or other assets from one qualified retirement plan or traditional IRA and its reinvestment in another qualified retirement plan or traditional IRA. Hrblock taxcut You do not include the amount rolled over in your income, and you cannot take a deduction for it. Hrblock taxcut The amount rolled over is taxed later as the new program pays that amount to you. Hrblock taxcut If you roll over amounts into a traditional IRA, later distributions of these amounts from the traditional IRA do not qualify for the capital gain or the 10-year tax option. Hrblock taxcut However, capital gain treatment or the 10-year tax option will be restored if the traditional IRA contains only amounts rolled over from a qualified plan and these amounts are rolled over from the traditional IRA into a qualified retirement plan. Hrblock taxcut To qualify for the capital gain treatment or 10-year tax option, the plan participant must have been born before January 2, 1936. Hrblock taxcut You can also roll over a distribution from a qualified retirement plan into a Roth IRA. Hrblock taxcut Although the transfer of a distribution into a Roth IRA is considered a rollover for Roth IRA purposes, it is not a tax-free transfer unless you are rolling over amounts from Roth contributions and its earnings. Hrblock taxcut See Rollovers to Roth IRAs , later, for more information. Hrblock taxcut Qualified retirement plan. Hrblock taxcut   For this purpose, a qualified retirement plan generally is: A qualified employee plan, A qualified employee annuity, A tax-sheltered annuity plan (403(b) plan), or An eligible state or local government section 457 deferred compensation plan. Hrblock taxcut The CSRS, FERS, and TSP are considered qualified retirement plans. Hrblock taxcut Distributions eligible for rollover treatment. Hrblock taxcut   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. Hrblock taxcut You cannot roll over any part of your CSRS or FERS annuity payments. Hrblock taxcut   You can roll over a distribution of any part of your TSP account balance except: A distribution of your account balance that you choose to receive in monthly payments over: Your life expectancy, The joint life expectancies of you and your beneficiary, or A period of 10 years or more, A required minimum distribution generally beginning at age 70½, A declared distribution because of an unrepaid loan, if you have not separated from government service (see Outstanding loan under Thrift Savings Plan, earlier), or A hardship distribution. Hrblock taxcut   In addition, a distribution to your beneficiary generally is not treated as an eligible rollover distribution. Hrblock taxcut However, see Qualified domestic relations order (QDRO) and Rollovers by surviving spouse , and Rollovers by nonspouse beneficiary , later. Hrblock taxcut Direct rollover option. Hrblock taxcut   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 or Roth IRA. Hrblock taxcut   There is an automatic rollover requirement for mandatory distributions. Hrblock taxcut A mandatory distribution is a distribution made without your consent and before you reach age 62 or normal retirement age, whichever is later. Hrblock taxcut The automatic rollover requirement applies if the distribution is more than $1,000 and is an eligible rollover distribution. Hrblock taxcut You can choose to have the distribution paid directly to you or rolled over directly to your traditional or Roth IRA or another qualified retirement plan. Hrblock taxcut If you do not make this choice, OPM will automatically roll over the distribution into an IRA of a designated trustee or issuer. Hrblock taxcut No tax withheld. Hrblock taxcut   If you choose the direct rollover option or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Hrblock taxcut However, if the rollover is to a Roth IRA, you may want to choose to have tax withheld since any amount rolled over is generally included in income. Hrblock taxcut Any part of the eligible rollover distribution paid to you is subject to withholding at a 20% rate. Hrblock taxcut Direct roll over amounts from Roth contributions and its earnings do not have tax withheld because you already paid tax on those amounts. Hrblock taxcut Payment to you option. Hrblock taxcut   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, traditional or Roth IRA. Hrblock taxcut However, the full amount is treated as distributed to you even though you actually receive only 80%. Hrblock taxcut 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. Hrblock taxcut Rollovers to Roth IRAs are generally included in income. Hrblock taxcut Eligible rollover distributions that are from Roth contributions do not have tax withheld because you already paid tax on those amounts. Hrblock taxcut If you leave government service before the calendar year in which you reach age 55 and are under age 59½ when a distribution is paid to you, you may have to pay an additional 10% tax on any part, including any tax withheld, that you do not roll over. Hrblock taxcut However, distributions from Roth contributions will not be subject to the 10% additional tax because it is a return of your cost (after-tax money). Hrblock taxcut Earnings from those contributions may be subject to the 10% additional tax if certain conditions are not met. Hrblock taxcut See Roth TSP balance , earlier. Hrblock taxcut Also, see Tax on Early Distributions in Publication 575. Hrblock taxcut Exception to withholding. Hrblock taxcut   Withholding from an eligible rollover distribution paid to you is not required if the distributions for your tax year total less than $200. Hrblock taxcut Partial rollovers. Hrblock taxcut   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. Hrblock taxcut See Lump-Sum Distributions in Publication 575. Hrblock taxcut However, if you roll over any part of the distribution, the part you keep does not qualify for this special tax treatment. Hrblock taxcut Rolling over more than amount received. Hrblock taxcut   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). Hrblock taxcut Example. Hrblock taxcut You left government service at age 53. Hrblock taxcut On February 1, 2013, you receive an eligible rollover distribution of $10,000 from you
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Employee Tool & Equipment Plans

This resource page provides information and guidance related to Employee Tool and Equipment Plans, sometimes called Service Technician’s Tool Reimbursement Plans (Tool Plans). Tool Plans are programs that are marketed in various industries including auto dealership and repair facilities and other trades that require employees to provide their own tools. The plans typically purport to receive tax-favored treatment as “accountable plans” under Internal Revenue Code § 62(c) and the accompanying regulations.

Available Guidance and other Information

View recent Department of Justice activity

Revenue Rule 2012-25
Revenue Rule 2012-25 clarifies that an arrangement that recharacterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement of the accountable plan rules under § 62(c) and the applicable regulations.  The ruling includes three examples of programs that do not satisfy the business connection requirement of the accountable plan rules because they impermissibly recharacterize wages.  It also includes an example in which the reimbursement arrangement satisfies the business connection requirement of the accountable plan rules because the employer’s plan only reimburses employees when a deductible business expense has been incurred in connection with performing services for the employer and the reimbursement is not in lieu of wages that the employees would otherwise receive.

ILM 201120021
A reimbursement or other expense allowance arrangement that pays an amount regardless of whether an expense is paid or incurred or reasonably expected to be paid or incurred by the employee in performing services for the employer violates the business connection requirement of an accountable plan. Specifically, such an arrangement violates the business connection’s reimbursement requirement under Treas. Reg. § 1.62-2(d)(3)(i). Accordingly, payments made under the arrangement are treated as made under a nonaccountable plan. Amounts treated as paid under a nonaccountable plan must be included in the employee’s gross income for the taxable year, are subject to withholding and payment of employment taxes, and must be reported as wages or other compensation on the employee’s Form W-2.

Employee Tool & Equipment Plans Alert
The Internal Revenue Service has established a compliance team to address significant concerns with certain Employee Tool and Equipment Plans that purport to receive tax-favored treatment as accountable plans.

IRS Letter Ruling 200930029
An employer's expense reimbursement plan satisfies the business connection, substantiation, and return of excess requirements of an accountable plan.  Payments made under the Plan in accordance with the terms of the plan will be excluded from the Technician’s income and will not be wages subject to the withholding and payment of employment taxes.

Chief Counsel Advice -   ILM 200745018
A legal memorandum that concludes that an employer's tool reimbursement plan does not satisfy the requirements of an accountable plan. 

Revenue Ruling 2005-52
This ruling holds that tool allowances paid to employees are not paid under an accountable plan because the substantiation and return of excess requirements are not met. 

 

Page Last Reviewed or Updated: 13-Feb-2014

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