Ask The Experts: Retirement

By Reg Jones

CSRS Offset and taxes

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Q. I’m planning to retire under CSRS Offset in December. Is local, state and federal tax the only tax I will have to pay? No Social Security or Medicare?

A. Social Security and Medicare taxes are only deducted from earnings from wages or self-employment, not other sources of income, such as annuities.

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WEP

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Q. I am retired under CSRS, and have more than 40 credits of Social Security accrued. I am almost 62, and want to apply for Social Security benefits. How much will the windfall elimination provision hit me for? I spoke to several other CSRS retirees, and only a few said they took a 60 percent reduction, while some took no reduction. I can’t figure why each case appears to take a different amount off due to WEP.

A. Anyone who receives an annuity in whole or part from a retirement system where he didn’t pay Social Security taxes is subject to the windfall elimination provision. The WEP reduces but doesn’t eliminate the Social Security benefit of anyone who has fewer than 30 years of substantial earnings under Social Security. For more information about the WEP and how it works, go to http://ssa.gov/pubs/10045.html.

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Retirement contributions and taxes

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Q. I am a recently retired CSRS employee. I note a huge inequity concerning my CSRS retirement contributions from the federal retirement benefits booklet the Office of Personnel Management sent me. I am told that I have a retirement contribution credit of $164,836 after-tax dollars. From this amount, I will get 310 equal monthly payments of $531.73 that will be a tax-exempt portion of my total monthly annuity.

However, I am told once I receive gross monthly retirement benefits that exceed my contributions (tax exempt and taxed portion), there are no more contribution credits in my account, and no lump-sum payment will be made.  What regulation under Title 5 U.S. Code (or others) allows the government to screw me by extending the time period to use up my tax-free portion of my annuity while minimizing the time to exhaust my contribution amount? According to the retirements benefits booklet OPM sends, recovering an amount equal to my retirement contributions for tax purposes is treated differently from exhausting my lump-sum contribution credit. Has there been a class-action suit addressing this issue?

A. The amount of your retirement contributions that are considered a tax-free part of your annuity during any calendar year are determined by actuarial (life expectancy) tables contained in the federal tax code. To learn about the whys, wherefores and how to file, download a copy of IRS Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits. You’ll find it at www.irs.gov/pub/irs-pdf/p721.pdf.

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Annuity and taxes

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Q. Are my CSRS retirement annuities subject to Social Security and Medicare tax if I retire at age 58 with 37 years of service?

A. No. Social Security and Medicare taxes are only taken from earnings from wages or self-employment, not annuities.

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WEP, Social Security and survivor annuity

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Q. I am a retired Postal Service employee under CSRS. I am 66 and have been collecting Social Security since turning 62. My Social Security benefit was reduced by taking benefits at 62 and by the windfall elimination provision. My CSRS annuity was also reduced because I opted for the CSRS survivor benefit. However, I am nine years older than my wife, who is 57 and intends to work until she can begin her early retirement at 62.

1. If my wife and I continue to file our taxes as “Married – jointly” and I suspend my Social Security benefits in the beginning of the year that my wife becomes eligible for Social Security benefits, will her Social Security benefit also be subject to WEP reduction as mine is now?

2. If so, will that still apply to my wife’s CSRS survivor benefit in the event of my death?

A. I can think of no benefit to be gained and much to lose if you suspend your own Social Security benefit. Your being subject to the windfall elimination provision won’t have any effect on her own earned Social Security benefit. She’ll receive that in full. Neither will the WEP have any effect on her survivor annuity if you should die before her. She’ll get the full amount.

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WEP and disability retirement

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Q. I am a 57-year-old federal employee with 11 years creditable service under FERS. Earlier in life, I became disabled as a result of a line-of-service duty incident after 15 years as a California law enforcement officer. I receive a lifetime industrial disability retirement (tax-free) from the California Public Employees’ Retirement System.

I intend on retiring in five years, at 62½. Will I be subject to the windfall elimination provision due to my law enforcement employment outside of the Social Security system? Does my disability retirement play any role in reducing my Social Security entitlement? By my calculations, I will have 26 years of  substantial earnings under Social Security.

Also, I’m still trying to figure out the meaning of “bend point.”

A. The windfall elimination provision will apply if you have fewer than 30 years of substantial earnings under Social Security. I’m not aware that your disability retirement benefit will have any effect pro or con on your Social Security benefit.

Social Security benefits are weighted in favor of low-income workers. The bend points you referred to are the points at which the percentages used in the benefit computation change. In 2013, the first $791 of a beneficiary’s average indexed monthly earnings (AIME) would be multiplied by .90, over $791 but less than $4,768 by .32 percent, and everything over $4,768 by .15 percent.

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CSRS survivor annuity withholding and taxes

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Q. I will be retiring in June and am trying to compute the number of federal tax exemptions, etc., that I take.  I looked through my notes from my last federal retirement planning class and saw that I jotted down that the amount withheld for survivor annuity from one’s monthly pension is a pretax item.  I thought it would be smart to obtain verification or validation rather than assume I heard and recorded this correctly.

If the survivor annuity withheld is subject to federal income tax at the time of withholding, then the portion withheld should be nontaxable when the survivor annuity gets paid out (sort of like the tax-free portion of one’s CSRS 7 percent contribution). Surely, CSRS pensioners and their survivors aren’t taxed twice on this income.

A. You’ll find out how your annuity and that of a survivor are treated in Internal Revenue Service Publication 721, Tax Guide for U.S. Civil Service Retiree Benefits, available at www.irs.gov/pub/irs-pub/p721.pdf.

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OASDI and taxes

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Q. I recently started working part time. I requested taxes be deducted from my payroll.  I note that I am being taxed old age, survivors and disability insurance. Is it a mandatory tax if I’m already retired?

A. Yes. Anyone who has earnings from wages or self-employment is required to pay that tax, even if he or she is already receiving a Social Security benefit.

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Social Security credits

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Q. I am a CSRS employee who has worked for the government for 40 years. I also have 27 credits for Social Security. I work for my husband as an accountant for free. If I start charging him and take payments under a 1099, how many credits do I have to earn to get Social Security payments on top of my CSRS benefit when retire?

A. In 2013, you’d need to earn $1,160 to get one Social Security credit, $4,640 to earn four credits. It would take you over three years to collect the 40 credits you’d need to be entitled to a Social Security benefit.

Note: If you do become entitled to a Social Security benefit, you’ll be subject to the windfall elimination provision. The WEP reduces the Social Security benefit of anyone who receives an annuity from a retirement system, like CSRS, where he or she didn’t pay Social Security taxes.

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High-3 and pretax FEHB premiums

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Q. I was just told by my human resources specialist that when pretax Federal Employees Health Benefits premiums reduce my taxable income, they also reduce my salary for the computation of high-3 average salary for retirement. Is this true? It doesn’t sound right to me, and I’ve never heard such a thing.

A. You haven’t heard such a thing because it isn’t true. Your high-3 is based on your highest average pay rates during any three consecutive years before any deductions are taken from that pay.

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WEP

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Q. I paid Social Security tax on my “SS statement earnings record,” from 1963 to 1974, and in 1985. I have 27 out of the 40 credits. My retirement number is 66 (I will turn 66 in August). I am still employed. Will I be eligible for Social Security retirement pay (no windfall elimination provision), even though still employed through this year?

A. I’m assuming that you are a CSRS employee. If so, you are subject to the windfall elimination provision. However, since you don’t have 40 credits under Social Security, you won’t be eligible for a Social Security benefit. If you earn enough credits to qualify for a Social Security benefit, it will be subject to the WEP, regardless of your age.

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FERCCA

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Q. My agency committed an error by moving me from CSRS to FERS. After 18 months and senatorial support, it was finally resolved; the agency satisfied the debt; and I retired Dec. 29. I have since received W2-Cs for past three years. I am looking at a decrease of approximately $17,000 in Social Security taxes withheld for those three years. Those monies were pulled back and put into my CSRS account. If the Internal Revenue Service determines that there is now a tax liability after filing my amended returns, can I make an appeal to the Office of Personnel Management (under the provisions of Federal Erroneous Retirement Coverage Correction Act) to reimburse me for that liability?

A. No.

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Disability retirement and taxes

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Q. I am a 52-year-old FERS clerk working for the Postal Service. I was been diagnosed with Parkinson’s disease in November 2005. I am wondering about a disability retirement and how the money I am paid, if approved, is taxed or not?

A. The Internal Revenue Service considers CSRS and FERS disability annuities taxable income. If you were also approved for a Social Security disability benefit and judged by them to be totally disabled for any gainful employment, then your benefits would be tax-free.

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Reporting retiree pay on taxes

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Q. This year’s tax (2012) is the first I will file as a FERS retiree. I understand a portion of my retiree pay is a return of contributions and is tax-free. How do I report this? Will it be identified on my 1099?

A. The 1099 form that the Office of Personnel Management sends you will show the amount of your retirement contributions. Plug that number into the worksheet you’ll find in Internal Revenue Service Publication 721, which you can access at www.irs.gov.

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Alternative annuity and taxes

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Q. Years ago, at a retirement seminar, an instructor said that if a retiring employee has a debilitating or terminal illness, they can retire and be paid a lump sum equal to all of the payments they made into CSRS. There is a reduction to the annuity for this payment. Any credence to the statement? If it is true, is the lump sum taxable immediately? If taxable, does the retiree get to take a 10 percent tax write-off for each year he collects an annuity, as regular retirees?

A. What you are referring to is the alternative form of annuity. It allows employees with a life expectancy of less than two years to receive a lump-sum payment of the contributions they have made to the retirement system.

To find out which conditions provide prima facie evidence of a life-threatening condition, go to www.opm.gov/retire/faq/glossary.asp. Since the lump-sum payment would be a return of retirement contributions, which have already been taxed, there wouldn’t be any tax consequences.

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SF 52

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Q. I have been reassigned to a position in Atlanta from Albuquerque, N.M. This move is permanent. Do I need a SF 52 prepared to change my duty station and locality pay? Do I need a SF 52 to change my taxes and health insurance? This position is considered virtual.

A. All personnel actions must be documented with a Standard Form 52. It will record where you are now, your new duty station and the rate of pay at each. There is no place on the SF 52 to record changes in taxes or health insurance. When your official personnel folder is transferred to your new duty station, whatever you have already designated as your tax deductions and FEHB plan coverage will continue as is. Any change in your tax deductions will have to be made through your new payroll office. Your FEHB enrollment can be changed during the open season, if you want to do that.

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‘Rate change’

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Q. I had more money taken out of my paycheck No. 26 for Social Security old age, survivor and disability insurance and a notation saying “rate change.” I looked at the Social Security page and there has been no rate change to the amount of money taken out for Social Security (OASDI) in 2013. It is the same amount of money taken out as 2012. Even though we get receive our check in January 2013, the earnings are from December 2012. I can’t find any information on any rate change on the NFC Web page.

A. Where have you been? As part of the “fiscal cliff” deal passed by Congress and approved by the President, the two-year-old payroll tax holiday came to an end. Under the tax holiday, the standard 6.2 percent payroll tax was cut to 4.2 percent for all American workers. Now it’s back up to 6.2 percent.

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Social Security quarters and annual leave lump sum

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Q. I will retire this year under CSRS. I lack three quarters to qualify for Social Security benefits. Will Social Security taxes be deducted from my lump-sum payment for annual leave?

A. If you are a regular CSRS employee, you haven’t had any Social Security taxes deducted from your pay and you won’t have any deducted from your lump-sum payment.

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Earnings limit

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Q. I am retired from the Postal Service. I am turning 66. If I pick up Medicare Part B, can I claim it on my taxes? How much in yearly salary can I earn if I go back to work?

A. If you have reached your full Social Security retirement age, there is no limit on the amount you can earn. However, if you were to return to work for the federal government, in most cases your salary would be reduced by the amount of your annuity.

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Deductions from annuity

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Q. Is there any way to figure out how much would be deducted from a Postal Service annuity check due to an early-out? I live in Jamaica, N.Y. Will they still deduct federal, state, Medicare, Social Security?

A. Federal taxes will be deducted, but New York state taxes won’t. Neither will Medicare Part A or Social Security taxes. That’s because those two are only deducted from earnings, not annuities.

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