The following is a question submitted by a Federal Times readers about retirement and other issues facing the federal workforce. It is answered by Reg Jones, a charter member of the senior executive service and a Federal Times columnist.
“My brother passed away after 17 years of retirement. His total contribution was $116,227.00. The annual deduction was $4,499, totaling $76,483.00. There is $39,744.00, in taxed, but not recovered contributions. In reading Pub. 721, it says that this amount may be deducted from his final tax return. Where on the tax return do I take this deduction, Schedule 1, Line Z, or as an itemized deduction, meaning he loses the standard deduction and technically only will recover a portion of the taxed contributions?”
What your brother was allowed to deduct on his income tax returns was not what was actually happening with his contributions to the retirement system. When the tax law was changed, it reduced the burden on the government by allowing him to only claim a deduction on his already taxed retirement contributions using actuarial tables based on his age at retirement. What that law didn’t do was change the original law governing the return of retirement contributions in his annuity. Under that law, retiree annuities are first paid with the money they contributed to the retirement system. Only then are government funds used. The amount he contributed to the retirement system was actually paid out to him in the first 18 to 24 months of his retirement. As a result, there is nothing left for you to deduct.
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Reg Jones, a charter member of the senior executive service, is the resident expert on retirement and the federal government at Federal Times. From 1979 until 1995, he served as an assistant director of the U.S. Office of Personnel Management handling recruiting and examining, white and blue collar pay, retirement, insurance and other issues. Opinions expressed are his own.