Q. My father passed away in 2001 and he retired under the CSRS plan in April 1983. My mother has been receiving a CSRS survivor annuity. This year the tax preparer is saying that her annuity is tax-free based on the contribution my father made into the CSRS. I’m a little confused because since her 2001 tax record no one has ever said her annuity was tax-free. Why are they saying it now? Her 1099 reflect the employee contribution amount, but also shows the taxable amount as unknown. I have tried to research the IRS pubs, but the formulas to use don’t reflect a retirement date of 1983 or sooner.
Any help would be appreciated so I can ensure her taxes are prepared correctly and will be a continued benefit to her.
A. Your tax preparer is mistaken. Because your father retired before July 2, 1986, it’s likely that he was covered by the “three-year rule.” In other words, his annuity payments were tax-free until he recovered the full amount of his retirement deductions, which would have happened within that three-year window. Thereafter, his annuity was 100 percent taxable. Therefore, your mother’s survivor annuity would be 100 percent taxable. If, on the other hand, he elected to be covered under the “general rule,” a small portion of each monthly annuity payment would have been tax-free regardless of how much he contributed. If that were the case, the same dollar amount would be tax-exempt on your mother’s survivor annuity. The only way to see which way he went is to look at his prior tax filings to see if the taxable amount of his annuity was less than the actual amount he received.
