Civil Service Federal Employees Federal Employees Federal Employees

Retirement Group Life Health Benefits Retirement

System Insurance Program System

United States

Office of Personnel Management

Retirement and Insurance Service

Benefits Administration Letter

Number: 97-113 Date: November 28, 1997 

Subject: New Federal Income Tax Rules for Annuities Commencing After

December 31, 1997

Background: Section 1075 of Public Law 105-34, the Taxpayer Relief Act of 1997,

enacted August 5, 1997, amended section 72(d) of the Internal Revenue

Code to change the "simplified general rule" for determining the taxfree portion of an annuity. The change applies only to annuities that

begin after December 31, 1997, and that are "payable over the lives of

more than one individual." 

Simplified

General Rule

For annuities that begin on or after July 2, 1986, a portion of each

monthly annuity payment is a tax-free return of the annuitant's

retirement contributions. To determine how much of his or her monthly

annuitant payment is tax free, the annuitant divides his or her total

retirement contributions by the total number of anticipated monthly

payments that will have a tax-free component. This number is found in

a table in 26 U.S.C § 72(d), and it is based on the annuitant's age at

retirement.

Change Made

by the

Taxpayer Relief

Act

Section 1075 of the Taxpayer Relief Act provides that for annuities

beginning after December 31, 1997, there are now two tables for

determining how many monthly payments have a tax-free component,

and for determining the size of the tax-free component. Employees who

retired after July 2, 1986, and before December 31, 1997, or employees

who retire after December 31, 1997, but have no survivors will still use

the current tax table. The change is only for employees who retire after

December 31, 1997, and who have a survivor.

The Taxpayer Relief Act of 1997 creates a new table for figuring the tax

free amount if a survivor annuity has been provided. The table is based

on combined ages of the annuitant and the person for whom the survivor

annuity has been provided.
Benefits Administration Letter 97-113 2

If the combined ages of annuitants are: The number is:

Not more than 110 410

More than 110 but not more than 120 360

More than 120 but not more than 130 310

More than 130 but not more than 140 260

More than 140 210

We have asked the Internal Revenue Service (IRS) to address several

points that the change in law does not specifically cover. These include

how to handle cases in which survivor benefits may be payable to more

than one person (such as a spouse and former spouse), what (if

anything) a retiree should do if his or her marital status changes after

retirement, and whether insurable interest elections are treated the same

as elections to provide benefits for spouses.

For Further

Information

The IRS is updating Publication 721 "Tax Guide to U.S. Civil Service

Retirement Benefits." We will notify you when the updated version is

available.

IRS Publications can be requested by calling 1-800-TAX-FORM or by

visiting the IRS internet site at http://www.irs.ustreas.gov.

Mary M. Sugar, Chief

Agency Services Division

Retirement and Insurance Service