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Taxation of Retirement Benefits
This is a general summary of how StanCERA withholds from retirement payments and reports such payments and withholding to the Internal Revenue Service and California Franchise Tax Board. The general provisions in this summary may not apply to your benefits. You should consult with an independent tax professional to ensure that you are properly filing your tax returns and paying the correct amount of federal and state taxes.
Retiree Payroll Federal and State Income Tax Withholding Information
All Stanislaus County Employees' Retirement Association (StanCERA) retirees who receive a pension and do not take a refund are required to select one of three tax withholding options:
· to have no federal and/or state income taxes withheld;
· to have a specific dollar amount withheld for federal and/or state income taxes;
· to have federal and/or state income taxes withheld according to tax tables based on marital status and number of exemptions.
For those who elect to have their withholding based on tax tables, taxes will not be withheld unless your gross monthly retirement allowance exceeds the minimum amount listed on the tax table for your filing status. If you do not choose a filing status and exemption, StanCERA will not withhold state or federal taxes.
You may be subject to penalties assessed by the IRS and FTB if you do not have a sufficient amount of tax withheld and fail to pay the correct amount of estimated taxes during the year that you receive income.
California State Tax Information for Non-Residents
If you live outside the State of California, no California state taxes will be withheld unless you elect withholding. StanCERA is still required to report the benefits paid to the California Franchise Tax Board.
1099-R Tax Statement
Each January, StanCERA will provide you with a 1099-R form that contains information on the benefits paid to you by StanCERA in the prior calendar year. Box 1 of the 1099-R, labeled "Gross Distribution," contains the total amount of the retirement benefits paid in the prior year (including any Health Insurance Allowance). There are special rules for service connected disability benefits, described in the section below. Box 2a, labeled "Taxable Amount" contains the amount of the benefit that is taxable (including the Health Insurance Allowance).
Service-Connected Disability Retirement
The Internal Revenue Code provides special tax treatment if you retire due to a service-connected disability. Service-connected disability benefits from StanCERA that are not calculated based upon your age, service or contributions generally may be excluded from taxation. If your service connected disability pension is no more than 1/2 of your final average salary as determined by StanCERA, the entire amount is generally tax free because it is in the nature of workers compensation. If your service connected disability pension is more than 1/2 of your FAS, then generally the part that equals 1/2 of FAS is tax free and the remainder is taxable. However, if you retire on a disability under a statutory presumption that it is service connected (e.g., for heart trouble or cancer), generally the IRS and FTB will not treat your pension as tax free.
In addition, if all or part of your pension is tax free because it is service connected, then generally any related COLA is tax free. The COLA will be prorated so that, for example, if 3/4s of your pension is tax free, then 3/4s of the COLA will be tax free.
Because the Health Insurance Allowance is based on your number of years of service, it is taxable even if you receive a service connected disability pension.
If you receive any taxable amount from StanCERA, the entire benefit paid to you will be reported in Box 1 of the 1099-R as Gross Distribution. The taxable amount reported in Box 2a will be reduced by any tax free service connected disability and by a portion of your after-tax contributions calculated using the rules for regular retirement payments as set out below.
Please note that if you retire with a service-connected disability and elect to have taxes withheld from your monthly benefit using the tax tables, the amount withheld from your monthly check will be based on the total monthly allowance that you receive. This may result in excess withholding.
Calculation of the Taxable Amount of Your Benefit
Generally, the full amount of your pension is taxable except as described above for service connected disability benefits. Also, the Health Insurance Allowance is taxable. However, if you contributed to StanCERA from after-tax funds, then you can recover these amounts tax free. The amount of your after-tax contributions that you can recover tax free each year is reported on Box 5 of your Form 1099-R The rules on recovery are different depending on when you retired.
If you retired before July 2, 1986
The "Three Year Rule" was the method used to determine the taxability of your retirement benefit (so long as your total after-tax contributions did not exceed your total pension payments for the first 36 months of distribution). This rule allowed you to take up to 36 months of your initial retirement income tax free in order to recover your previously taxed contributions to the plan. Your retirement benefit is most likely fully taxable now.
If you retired between July 2, 1986 through November 18, 1996
StanCERA uses the IRS safe harbor method under which you recover your already taxed contributions over a fixed number of years that were calculated based upon your age at retirement. (See 1099-R Retiree Worksheet 1 for the calculation format.) You should have a letter that was sent in the year of your retirement with the already taxed contributions amount typed on it. Contact StanCERA staff if you need this information.
If you retired on or after November 19, 1996
StanCERA uses the IRS-required method under which you recover your already taxed contributions over a fixed number of years that are calculated based upon either your age at retirement or the combined ages of you and your youngest beneficiary.
In order to calculate an estimate of the taxable portion of your retirement benefit under this method you need to know the amount of after-tax contributions you made to StanCERA during your employment. This amount is listed on the Retirement Allowance Program summary provided to you at the time of your retirement, or can be provided to you by contacting StanCERA staff.
If your retirement allowance will NOT continue to anyone upon your death, you can use the 1099-R Retiree Worksheet 3 to calculate your StanCERA retirement taxable income.
If your retirement allowance will continue on to your beneficiary upon your death (even at a reduced rate), the 1099-R Retiree Worksheet that you use to calculate your StanCERA retirement taxable income will depend upon your retirement date. If you retired on or after November 19, 1996, and before January 1, 1998, you can use the 1099-R Retiree Worksheet 3 to calculate your StanCERA retirement taxable income. If you retire on or after January 1, 1998, you can use the 1099-R Retiree Worksheet 2 to calculate your StanCERA retirement taxable income.
StanCERA's staff cannot provide tax advice so cannot answer your personal tax questions. If you have questions regarding federal income taxes please contact the Internal Revenue Service (800) 829-1040, or state income taxes contact the State Franchise Tax Board (800) 852-5711, or consult with your personal tax advisor. You may also wish to obtain a copy of Internal Revenue Service Publication 575, "Pension and Annuity Income", or visit the web site at http://www.irs.ustreas.gov/ for more detailed information on the federal taxation of your retirement benefit. For more information on California taxation of your retirement benefit, you may wish to obtain a copy of State of California Franchise Tax Board Publication 1005 Pension and Annuity Guidelines.