Taxes: "Qs & As" on Pension Taxability for federal retirees...
Please consult your tax advisors for details.
Good luck, everyone ;-).
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ftp.fedworld.gov
Pubs 525 & 721:
irs.ustreas.gov
irs.ustreas.gov
>>>You've worked hard for that federal annuity...so now it's
time to relax and enjoy those Golden Years!
Federal retirees who really want to put their minds at ease
should invest a little time to ensure that their financial house
is in order -- and that may include keeping abreast of tax
concerns and taxpayer responsibilities.
The Internal Revenue Service (IRS) has prepared the follow-
ing "Qs and As" to aid the federal retiree who may need answers
to "retiring" tax questions.
Q Is my federal retirement income taxable?
A Yes. Although civilian retirees are not taxed on the part
of the annuity that represents their own contribution, the
rest of the annuity they receive is taxable. This includes
disability retirement benefits. The taxable portion must be
added to other taxable income (bank interest, dividends,
wages, etc.) to determine whether a retiree owes any income
tax. Office of Personnel Management (OPM) Form 1099-R,
Statement of Annuity Paid, is mailed to federal retirees in
January each year.
For military retirees, generally speaking, your retirement
pay is taxable. However, if you retired with disability
retirement pay awarded by Department of Defense (DoD), the
disability portion may not be taxable in certain instances.
Disability retirement pay should not be confused with
disability compensation which is awarded by the Department
of Veterans Affairs (DVA). Contact your nearest judge
advocate for assistance. Also, IRS Publication 525, Taxable
and Nontaxable Income, covers disability pay.
IRS Publication 721, Tax Guide to U.S. Civil Service Retire-
ment Benefits, explains that generally taxpayers must use
the General Rule or the Simplified General Rule to compute
the taxable part and the tax-free part of their annuity.
Q How will I know if I have to file an income tax return?
A If your gross income, including the taxable part of your
annuity, reaches a certain amount, you do have to file a
federal income tax return. This is referred to as the
"gross income filing requirement," and you can find it in
the Instructions for Form 1040 (and Form 1040A). Please
check this requirement -- based on age, filing status, gross
income, and other factors -- because it may change from year
to year.
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Q If I do have a tax liability, how do I cover it now that I'm
retired?
A Just as you had taxes withheld from your wages when you were
working for the federal government, you can request to have
federal income taxes withheld from your annuity.
Many retirees choose another method of covering their tax
liability, called estimated tax payments, whereby they make
quarterly payments to cover any tax.
Q What happens if I don't make estimated payments or have any
income tax withheld?
A There may be a penalty for not paying enough to cover your
expected tax. In the tax law language, this is called an
"underpayment of estimated tax penalty." Our tax law is
based on a pay-as-you-go system, which may require a person
to deposit payments throughout the current year in anticipa-
tion of filing his or her tax return by the April 15 dead-
line.
Q How can I arrange to have automatic withholding on my
federal annuity?
A For federal civilian retirees, write to the Office of
Personnel Management (OPM) and ask for a Form W-4P-A (a
civil service retiree's withholding certificate for pension
or annuity payments). By returning the form to OPM, your
annuity will be treated like wages for income tax withhold-
ing purposes. To change an election for withholding, or the
amount being withheld, you must contact OPM. Please be sure
to note your retirement claim number with any written re-
quest you send to OPM. Here's where to write:
Office of Personnel Management
Tax Section
P.O. Box 961
Washington, DC 20044
For military retirees, contact the Defense Finance and
Accounting Service Center that maintains your retirement pay
account.
Q Where can I get information on the estimated tax method, and
can you tell me a little more about it?
A Obtain a Form 1040-ES, Estimated Tax for Individuals, from
the Internal Revenue Service by calling the toll-free number
1-800-TAX-FORM (1-800-829-3676). Also, ask for the free IRS
Publication 505, Tax Withholding and Estimated Tax, which
explains the estimated tax method in great detail.
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Spend a few minutes going through the Form 1040-ES instruc-
tions and worksheet to determine your expected tax for the
year. Most people complete Form 1040-ES each spring as they
sit down to do their previous year's taxes. This allows
them to use the previous year's tax return as a guide for
sources of taxable income and to better estimate the current
year's tax.
Once you determine the amount of estimated tax, divide the
tax into four quarterly payments that you mail to the IRS.
The IRS credits your "account" for the current year and
applies your estimated tax payments to the tax you show on
your federal income tax return.
Example: For 1999, you complete Form 1040-ES and determine
the estimated tax is $4,000. Divide the estimated tax
($4,000) by four to figure your quarterly payments ($1,000).
Mail each quarterly payment by the prescribed due date. You
file your 1999 federal income tax return in March 2000,
showing a total tax of $4,500. The $4,000 estimated tax
payments are credited against the $4,500 tax.
<b?Q I just discovered that I should have filed a tax return
based on my annuity income, but didn't? Will I face legal
action?
A If you did not file a tax return because you misunderstood
the annuity reporting rules, there is no better time to make
a fresh start.
Your local IRS office can work with you to file past due tax
returns, and they even have a special program for "non-
filers." The IRS wants the nonfiler to come forward on his
or her own to file a truthful return. It is the people who
willfully fail to file, or file a false return, who may face
criminal charges.
Q Is there an amnesty program for people who haven't filed
their federal returns for a while?
A The IRS does not offer an amnesty program, but has come to
realize that people have many reasons for not filing tax
returns, such as family illness, financial hardships, or
just plain procrastination--or don't have the money to pay
the tax due. The IRS is now working with people to help
them with overdue returns. Arrangements to pay are based on
ability to pay.
Although the IRS can waive some penalties when there is a
valid reason for not filing timely, the person must pay any
tax and interest that is due.
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Q What if I don't do anything about reporting my annuity
income?
A Using a computer program, the IRS automatically matches the
annuity shown on Form 1099-R with the tax return. If the
IRS does not receive a tax return reporting the annuity
amount, they will contact the taxpayer asking for an ex-
planation. If the retiree does not respond to these IRS
inquiries, he or she risks the possibility of collection
action being taken -- such as a levy on their retirement
income or other investments and assets. This means that the
government can reduce the monthly annuity payment to pay off
any overdue tax.
Q I'm still a little confused by all this. Where can I get
more information on reporting my federal annuity?
A Contact an IRS tax specialist by calling toll-free 1-800-
829-1040 to get more information on your tax obligations.
Also, IRS Publications 721, Tax Guide to U.S. Civil Service
Retirement Benefits, and 525, Taxable and Nontaxable Income,
explain the tax laws. You can get these free publications
by calling 1-800-TAX-FORM (1-800-829-3676).<<< |
