LEGISLATIVE DEVELOPMENTS AFFECTING INCOME TAX ON FEDERAL ANNUITIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000400060003-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 1
• Document Creation Date: December 23, 2016
• Document Release Date: December 29, 2010
• Sequence Number: 3
• Publication Date: November 25, 1985
• Content Type: MEMO

Subject: Legislative Developments Affecting Income Tax on Federal Annuities
Approved For Release 2010/12/29: CIA-RDP89-00066R000400060003-2
United States
Office of
Personnel Management Washington,, D.C. 20415
NOV 25 1985 Hrply Hel,r rr,
MEMORANDUM TO DIRECTORS OF PERSONNEL
From: James W. Morrison, J
Associate Director
for Compensation
In its deliberations on the pension and deferred compensation provisions of
the tax reform proposal, the Committee on Ways and Means of the House of
Representatives has proposed a change in the way that retirement benefits
to Federal annuitants and others are treated for income tax purposes. This
memorandum will bring you up to date on the status of the proposal and its
current provisions.
The Committee has proposed repeal of the current 3-year rule on recovery of
the annuity basis. That rule provides a tax-free period of up to three years
for an annuitant to recover through annuity payments an amount equal to the
amount (basis) contributed from salary to the Civil Service Retirement System
during active employment.
If the Committee proposal is enacted, a portion of Federal retirement pay-
ments would be subject to income tax from the outset. In effect, the basis
recovery would he spread out over an actuarially determined period (perhaps
as many as 20 years), and only that portion of annuity attributed to recovery
of the basis in a given year would be tax free. Assuming 20 years to be the
actuarial life-time expectation for receipt of annuity payments, then 95%
of the annuity received in any year would he subject to income tax.
The Committee is now drafting language which would repeal the 3-year rule as
of July 1, 1986. Any Federal retiree whose annuity commences before that
date would not be subject to the rule change.
I would like to emphasize that the final details of any change in the tax on
Federal annuities is still far from known. Employees who are eligible for
optional retirement should be cautioned against making precipitous retire-
ment decisions based solely on the proposal of the Ways and Means Committee.
Further deliberations in the House of Representatives and the Senate could
substantially alter what has been agreed to by the Committee.
Approved For Release 2010/12/29: CIA-RDP89-00066R000400060003-2