You've worked hard for that federal annuity...so now it's time to relax and enjoy those Golden Years! Federal retirees who really want to put their minds at ease should invest a little time to ensure that their financial house is in order -- and that may include keeping abreast of tax concerns and taxpayer responsibilities. The Internal Revenue Service (IRS) has prepared the follow- ing "Qs and As" to aid the federal retiree who may need answers to "retiring" tax questions. Q Is my federal retirement income taxable? A Yes. Although civilian retirees are not taxed on the part of the annuity that represents their own contribution, the rest of the annuity they receive is taxable. This includes disability retirement benefits. The taxable portion must be added to other taxable income (bank interest, dividends, wages, etc.) to determine whether a retiree owes any income tax. Office of Personnel Management (OPM) Form 1099-R, Statement of Annuity Paid, is mailed to federal retirees in January each year. For military retirees, generally speaking, your retirement pay is taxable. However, if you retired with disability retirement pay awarded by Department of Defense (DoD), the disability portion may not be taxable in certain instances. Disability retirement pay should not be confused with disability compensation which is awarded by the Department of Veterans Affairs (DVA). Contact your nearest judge advocate for assistance. Also, IRS Publication 525, Taxable and Nontaxable Income, covers disability pay. IRS Publication 721, Tax Guide to U.S. Civil Service Retire- ment Benefits, explains that generally taxpayers must use the General Rule or the Simplified General Rule to compute the taxable part and the tax-free part of their annuity. Q How will I know if I have to file an income tax return? A If your gross income, including the taxable part of your annuity, reaches a certain amount, you do have to file a federal income tax return. This is referred to as the "gross income filing requirement," and you can find it in the Instructions for Form 1040 (and Form 1040A). Please check this requirement -- based on age, filing status, gross income, and other factors -- because it may change from year to year. (continue) - 2 - Q If I do have a tax liability, how do I cover it now that I'm retired? A Just as you had taxes withheld from your wages when you were working for the federal government, you can request to have federal income taxes withheld from your annuity. Many retirees choose another method of covering their tax liability, called estimated tax payments, whereby they make quarterly payments to cover any tax. Q What happens if I don't make estimated payments or have any income tax withheld? A There may be a penalty for not paying enough to cover your expected tax. In the tax law language, this is called an "underpayment of estimated tax penalty." Our tax law is based on a pay-as-you-go system, which may require a person to deposit payments throughout the current year in anticipa- tion of filing his or her tax return by the April 15 dead- line. Q How can I arrange to have automatic withholding on my federal annuity? A For federal civilian retirees, write to the Office of Personnel Management (OPM) and ask for a Form W-4P-A (a civil service retiree's withholding certificate for pension or annuity payments). By returning the form to OPM, your annuity will be treated like wages for income tax withhold- ing purposes. To change an election for withholding, or the amount being withheld, you must contact OPM. Please be sure to note your retirement claim number with any written re- quest you send to OPM. Here's where to write: Office of Personnel Management Tax Section P.O. Box 961 Washington, DC 20044 For military retirees, contact the Defense Finance and Accounting Service Center that maintains your retirement pay account. Q Where can I get information on the estimated tax method, and can you tell me a little more about it? A Obtain a Form 1040-ES, Estimated Tax for Individuals, from the Internal Revenue Service by calling the toll-free number 1-800-TAX-FORM (1-800-829-3676). Also, ask for the free IRS Publication 505, Tax Withholding and Estimated Tax, which explains the estimated tax method in great detail. (continue) - 3 - Spend a few minutes going through the Form 1040-ES instruc- tions and worksheet to determine your expected tax for the year. Most people complete Form 1040-ES each spring as they sit down to do their previous year's taxes. This allows them to use the previous year's tax return as a guide for sources of taxable income and to better estimate the current year's tax. Once you determine the amount of estimated tax, divide the tax into four quarterly payments that you mail to the IRS. The IRS credits your "account" for the current year and applies your estimated tax payments to the tax you show on your federal income tax return. Example: For 1999, you complete Form 1040-ES and determine the estimated tax is $4,000. Divide the estimated tax ($4,000) by four to figure your quarterly payments ($1,000). Mail each quarterly payment by the prescribed due date. You file your 1999 federal income tax return in March 2000, showing a total tax of $4,500. The $4,000 estimated tax payments are credited against the $4,500 tax. Q I just discovered that I should have filed a tax return based on my annuity income, but didn't? Will I face legal action? A If you did not file a tax return because you misunderstood the annuity reporting rules, there is no better time to make a fresh start. Your local IRS office can work with you to file past due tax returns, and they even have a special program for "non- filers." The IRS wants the nonfiler to come forward on his or her own to file a truthful return. It is the people who willfully fail to file, or file a false return, who may face criminal charges. Q Is there an amnesty program for people who haven't filed their federal returns for a while? A The IRS does not offer an amnesty program, but has come to realize that people have many reasons for not filing tax returns, such as family illness, financial hardships, or just plain procrastination--or don't have the money to pay the tax due. The IRS is now working with people to help them with overdue returns. Arrangements to pay are based on ability to pay. Although the IRS can waive some penalties when there is a valid reason for not filing timely, the person must pay any tax and interest that is due. (continue) - 4 - Q What if I don't do anything about reporting my annuity income? A Using a computer program, the IRS automatically matches the annuity shown on Form 1099-R with the tax return. If the IRS does not receive a tax return reporting the annuity amount, they will contact the taxpayer asking for an ex- planation. If the retiree does not respond to these IRS inquiries, he or she risks the possibility of collection action being taken -- such as a levy on their retirement income or other investments and assets. This means that the government can reduce the monthly annuity payment to pay off any overdue tax. Q I'm still a little confused by all this. Where can I get more information on reporting my federal annuity? A Contact an IRS tax specialist by calling toll-free 1-800- 829-1040 to get more information on your tax obligations. Also, IRS Publications 721, Tax Guide to U.S. Civil Service Retirement Benefits, and 525, Taxable and Nontaxable Income, explain the tax laws. You can get these free publications by calling 1-800-TAX-FORM (1-800-829-3676).