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. The refund will include both regular and voluntary contributions you made to the fund, plus any interest payable.

If the refund includes only your contributions, none of the refund is taxable. 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). 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. See Rollover Rules in Part II for information on how to make a rollover.

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. 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. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.

The CSRS or FERS annuity you receive is subject to federal income tax withholding, unless you choose not to have tax withheld. OPM will tell you how to make the choice. The choice for no withholding remains in effect until you change it. These withholding rules also apply to a disability annuity, whether received before or after minimum retirement age.

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.

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

  

You also can view and download your Form CSA 1099R by visiting the OPM website at
www.servicesonline.opm.gov. To log in, you will need your retirement CSA claim number and your personal identification number.

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. The gross income filing requirements for the tax year are in the instructions to Form 1040, 1040A, or 1040EZ.

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

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

  

You also can view and download your Form CSF 1099R by visiting the OPM website at
www.servicesonline.opm.gov. To log in you will need your retirement CSF claim number and personal identification number.

  

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

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. (OPM has figured the taxable amount of your annuity shown on your Form CSA 1099R using the Simplified Method.) 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. The Simplified Method does not apply if your annuity starting date is before July 2, 1986.

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. This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. 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.

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. 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. 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.

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. Figuring this percentage is complex and requires the use of actuarial tables. For these tables and other information about using the General Rule, see Publication 939.

If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the Three-Year Rule. Under this rule, you excluded all the annuity payments from income until you fully recovered your cost. After your cost was recovered, all payments became fully taxable. You cannot use another rule to again exclude amounts from income.

The Three-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986.

Worksheet A. Simplified Method for Bill Smith

See the instructions in Part II of this publication under Simplified Method.

1.	Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a				1.	$ 8,000
2.	Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion *				2.	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. Otherwise, go to line 3.
3.	Enter the appropriate number from Table 1 below. 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.				3.	310
4.	Divide line 2 by line 3				4.	100
5.	Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, skip lines 6 and 7 and enter this amount on line 8. Otherwise, go to line 6				5.	800
6.	Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year				6.	0
7.	Subtract line 6 from line 2				7.	31,000
8.	Enter the smaller of line 5 or line 7				8.	800
9.	Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If you are a nonresident alien, also enter this amount on line 1 of Worksheet C. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead. 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.	$7,200
10.	Was your annuity starting date before 1987? Yes. Do not complete the rest of this worksheet. No. Add lines 6 and 8. This is the amount you have recovered tax free through 2007. You will need this number if you need to fill out this worksheet next year				10.	800
11.	Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable				11.	$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.

If you are eligible, you may choose an alternative form of annuity. If you make this choice, you will receive a lump-sum payment equal to your contributions to the plan and a reduced monthly annuity. You are eligible to make this choice if you meet all of the following requirements.

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.

Lump-Sum Payment

The lump-sum payment you receive under the alternative annuity option generally has a tax-free part and a taxable part. The tax-free part represents part of your cost. The taxable part represents part of the earnings on your annuity contract. 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. Deemed deposits and redeposits, which are described later under Lump-sum credit, are taxable to you in the year of retirement. Your taxable amount may therefore be more than the lump-sum payment you receive.

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 a traditional IRA. 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. See Rollover Rules, later, for information on how to make a rollover.

OPM can make a direct rollover only up to the amount of the lump-sum payment. Therefore, to defer tax on the full taxable amount if it is more than the payment, you must add funds from another source.

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. 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. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.

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

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

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

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

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.

Internal Revenue Service
Actuarial Group 2 SE:T:EP:RA:T:A2
1111 Constitution Ave., NW PE-4G6
Washington, DC 20224

Example.

David Brown retired from the federal government in 2007, one month after his 55th birthday. 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. The present value of his annuity contract was $155,000.

The tax-free part and the taxable part of the lump-sum payment are figured using Worksheet B, as shown on the next page. 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. See Reduced Annuity, later.

Worksheet B. Lump-Sum Payment for David Brown See the instructions in Part II of this publication under Alternative Annuity Option.

1.	Enter your lump-sum credit (your cost in the plan at the annuity starting date)	1.	$ 31,000
2.	Enter the present value of your annuity contract	2.	155,000
3.	Divide line 1 by line 2	3.	.20
4.	Tax-free amount. Multiply line 1 by line 3. (Caution: Do not include this amount on line 6 of Worksheet A in this publication.)	4.	$6,200
5.	Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Also, enter this amount on line 2 of Worksheet A in this publication.	5.	$24,800

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

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

How to report.   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. 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.

   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.

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. These annuity payments each will have a tax-free and a taxable part. To figure the tax-free part of each annuity payment, you must use the Simplified Method (Worksheet A). For instructions on how to complete the worksheet, see Worksheet A under Simplified Method, earlier.

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. Enter as your net cost on line 2 the amount from Worksheet B, line 5. 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.

Example.

The facts are the same as in the example for David Brown in the preceding discussion. In addition, David received 10 annuity payments in 2007 of $1,200 each. Using Worksheet A, he figures the taxable part of his annuity payments. He completes line 2 by reducing his $31,000 cost by the $6,200 tax-free part of his lump-sum payment. His entry on line 2 is his $24,800 net cost in the plan (the amount from Worksheet B, line 5). He does not include the tax-free part of his lump-sum payment on Worksheet A, line 6. David's filled-in Worksheet A is shown on the next page.

Worksheet A. Simplified Method for David Brown

See the instructions in Part II of this publication under Simplified Method.

1.	Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a				1.	$ 12,000
2.	Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion *				2.	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. Otherwise, go to line 3.
3.	Enter the appropriate number from Table 1 below. 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.				3.	360
4.	Divide line 2 by line 3				4.	68.89
5.	Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, skip lines 6 and 7 and enter this amount on line 8. Otherwise, go to line 6				5.	688.90
6.	Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year				6.	0
7.	Subtract line 6 from line 2				7.	24,800
8.	Enter the smaller of line 5 or line 7				8.	688.90
9.	Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If you are a nonresident alien, also enter this amount on line 1 of Worksheet C. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead. 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.	$11,311.10
10.	Was your annuity starting date before 1987? Yes. Do not complete the rest of this worksheet. No. Add lines 6 and 8. This is the amount you have recovered tax free through 2007. You will need this number if you need to fill out this worksheet next year				10.	688.90
11.	Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable				11.	$24,111.10
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.

Reemployment after choosing the alternative annuity option. 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. 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.

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

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. The gift may be taxable for gift tax purposes. The value of the gift is equal to the value of the annuity.

If you have recently retired, the following discussions covering annual leave, voluntary contributions, and community property may apply to you.

If you retired from federal service and are later reemployed by the Federal Government, you can continue to receive your annuity during reemployment. The employing agency usually will pay you the difference between your salary for your period of reemployment and your annuity. This amount is taxable as wages. Your annuity will continue to be taxed just as it was before. If you are still recovering your cost, you continue to do so. If you have recovered your cost, the annuity you receive while you are reemployed generally is fully taxable.

The following special rules apply to nonresident alien federal employees performing services outside the United States and to nonresident alien retirees and beneficiaries. A nonresident alien is an individual who is not a citizen or a resident alien of the United States.

All of the money in your TSP account is taxed as ordinary income when you receive it. (However, see Uniformed services TSP accounts, next.) This is because neither the contributions to your TSP account nor its earnings have been included previously in your taxable income. The way that you withdraw your account balance determines when you must pay the tax.

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

  

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

  If you receive a single payment or you choose to receive your account balance in monthly payments over a period of less than 10 years, the TSP generally must withhold 20% for federal income tax. If you choose to receive your account balance in monthly payments over a period of 10 or more years or a period based on your life expectancy, the payments are subject to withholding as if you are married with three withholding allowances, unless you submit a withholding certificate. See also Withholding from Thrift Savings Plan payments earlier under Tax Withholding and Estimated Tax in Part I.

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

  

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

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. You do not include the amount rolled over in your income, and you cannot take a deduction for it. The amount rolled over is taxed later as the new program pays that amount to you. 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. 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.

After 2007, you can also roll over a distribution from a qualified retirement plan to a Roth IRA. Although the transfer of a distribution to a Roth IRA is considered a rollover for Roth IRA purposes, it is not a tax-free transfer. See Rollovers to Roth IRAs, later, for more information.

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. See Tax on Early Distributions in Publication 575.

If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from an eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. The premiums can be for coverage for you, your spouse, or dependents. The distribution must be made directly from the plan to the insurance provider. You can exclude from income the smaller of the amount of the insurance premiums or $3,000. You can only make this election for amounts that would otherwise be included in your income. The amount excluded from your income cannot be used to claim a medical expense deduction.

For this purpose, an eligible retirement plan is a governmental plan that is:

The CSRS and FERS are considered eligible retirement plans.

If you received annuity benefits that are not fully taxable, report the total received for the year on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Also, include on that line the total of any other pension plan payments (even if fully taxable, such as those from the TSP) that you received during the year in addition to the annuity. Report the taxable amount of these total benefits on line 16b (Form 1040), line 12b (Form 1040A), or line 17b (Form 1040NR). If you use Form 4972, Tax on Lump-Sum Distributions, however, to report the tax on any amount, do not include that amount on lines 16a and 16b, lines 12a and 12b, or lines 17a or 17b, follow the Form 4972 instructions.

If you received only fully taxable payments from your retirement, the TSP, or other pension plan, report on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b, the total received for the year (except for any amount reported on Form 4972); no entry is required on line 16a (Form 1040), line 12a (Form 1040A), or line 17a (Form 1040NR).

If you retired on disability, the disability annuity you receive from the CSRS or FERS is taxable as wages until you reach minimum retirement age. Beginning on the day after you reach minimum retirement age, your payments are treated as a retirement annuity and you can begin to recover the cost of your annuity under the rules discussed in Part II.

If you find that you could have started your recovery in an earlier year for which you have already filed a return, you can still start your recovery of contributions in that earlier year. To do so, file an amended return for that year and each succeeding year for which you have already filed a return. Generally, an amended return for any year must be filed within 3 years after the due date for filing your original return for that year.

The tax treatment of certain other benefits is explained in this section.

You can take the credit for the elderly or the disabled if:

You are a qualified individual for this credit if you are a U.S. citizen or resident alien and, at the end of the tax year, you are:

You are retired on permanent and total disability if:

Even if you do not retire formally, you may be considered retired on disability when you have stopped working because of your disability.

You may be entitled to a special FERS death benefit if you were the spouse of an active FERS employee who died after at least 18 months of federal service. At your option, you can take the benefit in the form of a single payment or in the form of a special annuity payable over a 3-year period.

The tax treatment of the special death benefit depends on the option you choose and whether a FERS survivor annuity is also paid.

If you choose the single payment option, use the following rules.

If you choose the 3-year annuity option, at least part of each monthly payment is tax free. Use the following rules.

If you receive a CSRS or FERS survivor annuity, you can recover the employee's cost tax free. The employee's cost is the total of the retirement plan contributions that were taken out of his or her pay.

How you figure the tax-free recovery of the cost depends on your annuity starting date. This is the day after the date of the employee's death. The methods to use are the same as those described near the beginning of Part II under Recovering your cost tax free.

The following discussions cover only the Simplified Method. You can use this method if your annuity starting date is after July 1, 1986. You must use this method if your annuity starting date is after November 18, 1996. Under the Simplified Method, each of your monthly annuity payments is made up of two parts: the tax-free part that is a return of the employee's cost and the taxable part that is the amount of each payment that is more than the part that represents the employee's cost. The tax-free part remains the same, even if your annuity is increased. However, see Exclusion limit, later.

Example.

Diane Green, age 48, began receiving a $1,500 monthly CSRS annuity in March 2007 upon the death of her husband. Her husband was a federal employee when he died. She received 10 payments in 2007. Her husband had contributed $36,000 to the retirement plan.

Diane must use the Simplified Method. Her completed Worksheet A is shown on the next page. To complete line 3, she used Table 1 at the bottom of the worksheet and found that 360 is the number in the last column opposite the age range that includes her age. Diane keeps a copy of the completed worksheet for her records. It will help her figure her taxable annuity in later years.

Worksheet A. Simplified Method for Diane Green

See the instructions in Part II of this publication under Simplified Method.

1.	Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a				1.	$ 15,000
2.	Enter your cost in the plan at the annuity starting date, plus any death benefit exclusion *				2.	36,000
	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. Otherwise, go to line 3.
3.	Enter the appropriate number from Table 1 below. 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.				3.	360
4.	Divide line 2 by line 3				4.	100
5.	Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, skip lines 6 and 7 and enter this amount on line 8. Otherwise, go to line 6				5.	1,000
6.	Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year				6.	0
7.	Subtract line 6 from line 2				7.	36,000
8.	Enter the smaller of line 5 or line 7				8.	1,000
9.	Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b. If you are a nonresident alien, also enter this amount on line 1 of Worksheet C. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead. If your 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.	$14,000
10.	Was your annuity starting date before 1987? Yes. Do not complete the rest of this worksheet. No. Add lines 6 and 8. This is the amount you have recovered tax free through 2007. You will need this number if you need to fill out this worksheet next year				10.	1,000
11.	Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable				11.	$35,000
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.

Diane's tax-free monthly amount is $100 (line 4 of her worksheet). If she lives to collect more than 360 payments, the payments after the 360th will be fully taxable. If she dies before 360 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.

Survivors of Slain Public Safety Officers

Generally, if you receive survivor annuity payments as the spouse, former spouse, or child of a public safety officer killed in the line of duty, you can exclude the payments from your income. The annuity is excludable to the extent that it is due to the officer's service as a public safety officer. Public safety officers include law enforcement officers, firefighters, chaplains, ambulance crew members, and rescue squad members. The provision applies to a chaplain killed in the line of duty after September 10, 2001. The chaplain must have been responding to a fire, rescue, or police emergency as a member or employee of a fire or police department.

The exclusion does not apply if your actions were a substantial contributing factor to the death of the officer. It also does not apply if:

• The death was caused by the intentional misconduct of the officer or by the officer's intention to cause his or her own death,

• The officer was voluntarily intoxicated at the time of death, or

• The officer was performing his or her duties in a grossly negligent manner at the time of death.

The special death benefit paid to the spouse of a FERS employee (see FERS Death Benefit , earlier) is not eligible for this exclusion.

If a federal employee dies before retiring and leaves no one eligible for a survivor annuity, the estate or other beneficiary will receive a lump-sum payment from the CSRS or FERS. This single payment is made up of the regular contributions to the retirement fund plus accrued interest, if any, to the extent not already paid to the employee.

The beneficiary is taxed, in the year the lump sum is distributed or made available, only on the amount of any accrued interest. The taxable amount, if any, generally cannot be rolled over into an IRA or other plan and is subject to federal income tax withholding at a 10% rate. However, a nonspousal beneficiary making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, can roll over any taxable amount. In addition, the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. If the beneficiary also receives a lump-sum payment of unrecovered voluntary contributions plus interest, this treatment applies only if the payment is received within the same tax year. For more information, see Lump-Sum Distributions in Publication 575.

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

  Any unrecovered cost is allowed as a miscellaneous itemized deduction on the final return of the annuitant. This deduction is not subject to the 2%-of-adjusted- gross-income limit.

  

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

  

Worksheet D. Lump-Sum Payment at End of Survivor Annuity

1.	Enter the lump-sum payment	1.
2.	Enter the amount of annuity previously received tax free	2.
3.	Add lines 1 and 2	3.
4.	Enter the employee's total cost	4.
5.	Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero	5.

  The taxable amount, if any, generally cannot be rolled over into an IRA or other plan and is subject to federal income tax withholding at a 10% rate. However, a nonspousal beneficiary making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, can roll over any taxable amount. In addition, the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. If the beneficiary also receives a lump-sum payment of unrecovered voluntary contributions plus interest, this treatment applies only if the payment is received within the same tax year. For more information, see Lump-Sum Distributions in Publication 575.

Example.

At the time of your brother's death in December 2006, he was employed by the Federal Government and had contributed $45,000 to the CSRS. His widow received $6,600 in survivor annuity payments before she died in 2007. She had used the Simplified Method for reporting her annuity and properly excluded $1,000 from gross income.

Only $6,600 of the guaranteed amount of $45,000 (your brother's contributions) was paid as an annuity, so the balance of $38,400 was paid to you in a lump sum as your brother's sole beneficiary. You figure the taxable amount of this payment as follows.

Worksheet D. Lump-Sum Payment at End of Survivor Annuity — Example

1.	Enter the lump-sum payment	1.	$38,400
2.	Enter the amount of annuity previously received tax free	2.	1,000
3.	Add lines 1 and 2	3.	39,400
4.	Enter the employee's total cost	4.	45,000
5.	Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero	5.	0

The payment you receive as the beneficiary of a decedent's Thrift Savings Plan (TSP) account is fully taxable. However, if you are the decedent's surviving spouse (or someone other than the employee's spouse making a transfer described under Rollovers by nonspouse beneficiary in Part II under Rollover Rules ), you generally can roll over the payment tax free. If you do not choose a direct rollover of the decedent's TSP account, mandatory 20% income tax withholding will apply. For more information, see Rollover Rules in Part II. If you are neither the surviving spouse nor someone other than the employee's spouse making a transfer described above, the payment is not eligible for rollover treatment. The TSP will withhold 10% of the payment for federal income tax, unless you gave the TSP a Form W-4P to choose not to have tax withheld.

If the entire TSP account balance is paid to the beneficiaries in the same calendar year, it may qualify as a lump-sum distribution eligible for the 10-year tax option if the plan participant was born before January 2, 1936. See Lump-Sum Distributions in Publication 575 for details. Also, see Important Tax Information About Thrift Savings Plan Death Benefit Payments, which is available from the TSP.

Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed for the estate of a citizen or resident alien of the United States who died in 2007 if the gross estate is more than $2,000,000. Included in this $2,000,000 are any adjusted taxable gifts made by the decedent after 1976 and the specific exemption allowed for gifts by the decedent after September 8, 1976, and before 1977.

The gross estate generally includes the value of all property beneficially owned by the decedent at the time of death. Examples of property included in the gross estate are salary or annuity payments that had accrued to an employee or retiree, but which were not paid before death, and the balance in the decedent's TSP account.

The gross estate also usually includes the value of the death and survivor benefits payable under the CSRS or the FERS. If the federal employee died leaving no one eligible to receive a survivor annuity, the lump sum (representing the employee's contribution to the retirement system plus any accrued interest) payable to the estate or other beneficiary is included in the employee's gross estate.

CSRS or FERS annuity payments you receive as the survivor of a federal retiree are fully or partly taxable under either the General Rule or the Simplified Method.

If a deceased retiree has no beneficiary eligible to receive a survivor annuity, and the deceased retiree's annuity ends before an amount equal to the deceased retiree's contributions plus any interest has been paid out, the rest of the contributions plus any interest will be paid in a lump sum to the estate or other beneficiary. The estate or other beneficiary rarely will have to include any part of the lump sum in gross income. The taxable amount is figured as follows.

The taxable amount, if any, generally cannot be rolled over into an IRA or other plan and is subject to federal income tax withholding at a 10% rate. However, a nonspousal beneficiary making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, can roll over any taxable amount. In addition, the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. If the beneficiary also receives a lump-sum payment of unrecovered voluntary contributions plus interest, this treatment applies only if the payment is received within the same tax year. For more information, see Lump-Sum Distributions in Publication 575.

If you receive an additional survivor annuity benefit from voluntary contributions to the CSRS, treat it separately from the annuity that comes from regular contributions. Each year you will receive a Form CSF 1099R that will show how much of your total annuity received in the past year was from each type of benefit.

Figure the taxable and tax-free parts of your additional survivor annuity benefit from voluntary contributions using the same rules that apply to regular CSRS and FERS survivor annuities, as explained earlier under CSRS or FERS Survivor Annuity.

If you receive a payment from the TSP account of a deceased federal retiree, the payment is fully taxable. However, if you are the retiree's surviving spouse (or someone other than the retiree's spouse making a transfer described under Rollovers by nonspouse beneficiary in Part II earlier under Rollover Rules), you generally can roll over the otherwise taxable payment tax free. If you do not choose a direct rollover of the TSP account, mandatory 20% federal income tax withholding will apply. For more information, see Rollover Rules in Part II. If you are neither the surviving spouse nor someone other than the retiree's spouse making a transfer described above, the payment is not eligible for rollover treatment. The TSP will withhold 10% of the payment for federal income tax, unless you gave the TSP a Form W-4P to choose not to have tax withheld.

If the retiree chose to receive his or her account balance as an annuity, the payments you receive as the retiree's survivor are fully taxable when you receive them, whether they are received as annuity payments or as a cash refund of the remaining value of the amount used to purchase the annuity.

A federal estate tax return may have to be filed for the estate of the retired employee. See Federal Estate Tax in Part IV.

Any income that a decedent had a right to receive and could have received had death not occurred and that was not properly includible in the decedent's final income tax return is treated as income in respect of a decedent. This includes retirement benefits accrued and payable to a retiree before death, but paid to you as a survivor.

If the federal estate tax was paid on the decedent's estate and you are required to include income in respect of a decedent in your gross income for any tax year, you can deduct the portion of the federal estate tax that is from the inclusion in the estate of the right to receive that amount. For this purpose, if the decedent died after the annuity starting date, the taxable portion of a survivor annuity you receive (other than a temporary annuity for a child) is considered income in respect of a decedent.

For more information, see Income in Respect of a Decedent in Publication 559.