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 tax-free 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

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