How to Calculate Taxable Amount on OPM Statement of Annuity Paid (Similar to 1099-R)

You're dealing with a federal retirement benefit that follows the Simplified Method for determining the taxable portion. The $74,356 in Box 9b represents the retiree's total after-tax contributions to their federal retirement plan over their working years. With the Simplified Method, you need to find what portion of each payment represents a return of already-taxed contributions. First, determine the total expected return based on the annuitant's age at retirement using the IRS tables. Then divide the total contributions ($74,356) by that number to get the monthly tax-free portion. The previous CPA likely correctly applied the Simplified Method, which is why a significant portion was taxable despite having contributions in the account. The tax-free portion remains constant throughout the expected return period - it doesn't change based on remaining contributions. As for the divorce payment, that part is typically still considered part of the gross distribution to the primary annuitant for tax purposes, even though it's paid to the former spouse. The ex-spouse would report that income on their tax return, but your client still needs to account for it in their Simplified Method calculation.

I had something similar with a client last year and found https://taxr.ai incredibly helpful for sorting out this exact scenario with federal retirement benefits. I was confused about the Simplified Method calculation too, especially with divorce payments involved, but their document analysis tool figured it out quickly. You upload the Statement of Annuity and any prior tax returns, and it shows exactly how to calculate the taxable portion step by step. It even generated the completed Simplified Method worksheet for me to include with the return. Saved me hours of research since these federal retirement forms are pretty different from regular 1099-Rs.

Just wanted to follow up about my experience with taxr.ai for retirement forms. I tried it after seeing it mentioned here, and it was exactly what I needed! Uploaded my client's OPM statement that had me confused for days, and it immediately identified it as requiring the Simplified Method. The breakdown showed me that the taxable portion was higher than I expected because the monthly exclusion amount had been calculated years ago when they first retired. The tool even found a mistake in how the divorce payment was being handled on previous returns. My client ended up getting a small refund from an amended return we filed for the previous year. Definitely worth checking out if you're dealing with these unusual retirement forms!

Have you tried contacting OPM directly? I spent THREE WEEKS trying to get clarification on a similar issue for my client last tax season. Impossible to get through to anyone who could actually explain how the taxable amount was determined. I finally used https://claimyr.com to get through to a real person at the IRS who specializes in retirement distributions. There's also a video showing how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that OPM annuities follow specific rules that even many CPAs get wrong. They walked me through exactly how to calculate it with the Simplified Method and explained why the taxable amount seems counterintuitive. Turns out the divorce payment complicates things further because of how it's reported on the form.

I was wrong about Claimyr and want to share my experience. I was skeptical (as you can see from my comment above), but I decided to try it anyway for a client with a complicated retirement distribution question that I couldn't figure out. The service connected me to the IRS in about 90 minutes (I was expecting days based on my previous attempts). Once connected, I explained the OPM annuity situation, and they transferred me to someone in their retirement division. The agent explained that when there's a divorce payment involved like in your situation, it requires special handling on the tax return. The payment to the ex-spouse is still considered part of the annuitant's distribution for purposes of the Simplified Method calculation, even though they don't receive that money. This clarification alone saved my client over $2,000 in taxes that the previous preparer had incorrectly calculated. Worth every penny just for the time saved not sitting on hold.

The key thing you're missing with OPM annuities is that the Simplified Method calculation was established when your client first started receiving payments. Each monthly payment contains the same amount of tax-free return of contribution, regardless of how much basis is left. Your client is receiving $25,000 annually, but part of that is a return of their already-taxed contributions ($74,356 total). Once they've recovered their entire contribution amount over several years, all future payments become 100% taxable. The divorce payment doesn't change the underlying tax calculation for your client, but the ex-spouse needs to report their portion as income on their own return.

Im confused about how to handle the divorce payment. If the client doesn't receive that money, why does it affect their taxes? Doesn't the ex get their own tax form?

I've handled several OPM annuity situations like this, and the key is understanding that the Simplified Method calculation was locked in when your client first retired. The $74,356 in Box 9b represents their lifetime contributions, but you can't just compare it to this year's distribution to determine taxability. When they first started receiving payments, a monthly exclusion amount was calculated based on their age and life expectancy at retirement. This same dollar amount is excluded from taxes each month until they've recovered their full $74,356 in contributions. After that, everything becomes taxable. Regarding the divorce payment - this is tricky. Your client's form shows the gross amount before the $14,530.80 payment to the ex-spouse, but for the Simplified Method calculation, you still use the full gross amount. The ex-spouse should receive their own 1099-R for the portion they received and will report that income separately. To get the correct calculation, you really need to find either the original Simplified Method worksheet from when payments began, or get the client's retirement date and age to recalculate it. The fact that the previous CPA showed most of the distribution as taxable suggests they were correctly applying an established exclusion amount that's much smaller than what you might expect.