Tax Tips for Retired Federal Workers
Retired federal government employees or civil servants are privy to a number of tax benefits that the average civilian will not have access to when he completes his tax return. The reason for this stems from the fact that many federal government employees receive pensions that the private sector citizen does not receive. This has various tax implications. Internal Revenue Service Publication 721 governs much of the tax code for former federal employees.
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Thrift Savings Plan
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Federal employees can contribute to a Thrift Savings Plan or TSP that allows them to put away money that would otherwise be taxable if taken as ordinary income. Federal employees can later roll over the money from this plan into an individual retirement account, or IRA, to avoid the taxation for a disbursement from the TSP. This allows the former federal employee to defer taxation until receiving a disbursement from the IRA. Upon the death of a former federal employee, the TSP can also roll over to the surviving spouse.
Annuity Payments
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Federal government employees can receive annuity payments from two types of federally offered annuities: the Civil Service Retirement System or the Federal Employees' Retirement System. Former employees can elect to receive annuity payments without having withholding taxes taken out of the payments. However, this can result in the need to make estimated tax payments throughout the year. Failure to pay enough in estimated payments could result in a penalty. This decision to not have taxes withheld won't work for everyone -- especially those who do not wish to make estimated payments throughout the year. However, it can help with those that may wish to have some additional cash on hand.
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Lump-Sum Annuity Payments
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Former federal employees can receive lump-sum annuity payments, especially those who leave their government post before they are eligible for federal retirement. As with the Thrift Savings Plan, the former employee can choose to roll over this money into an IRA account and avoid taxation for taking a distribution. He will have to eventually pay taxes on the money when he begins to take contributions from the IRA, but will be able to avoid these in the short-term. If the retired employee rolls the payment over into a Roth IRA, however, he will be taxed for the entire amount for the current year in which he received the lump-sum payment.
State Deductions
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Those who work as federal government employees should not overlook the fact that they may also be eligible for additional tax deductions at the state level. The amount of the deduction will vary by state. Some states allow the retired federal employee to take a deduction from their state taxes if they receive a civil service annuity. For example, those in the state of Indiana can take a deduction of $2,000, as of 2010, as long as they are at least 62 years of age.
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