Future government retirees would get a major tax break under a bipartisan bill that would allow lump-sum pension payments to be rolled over into tax-deferred individual retirement accounts. Under current rules, federal retirees must pay taxes on about 90 percent of any lump-sum payment they receive.
Normally a bill such as this, this late in the legislative season, would be considered a long shot. But the pension benefits simplification bill sponsored by Sen. David H. Pryor (D-Ark.) and Rep. Rod Chandler (R-Wash.) has powerful co-sponsors. And it is scheduled for a Senate hearing Friday. Ten members of the Senate Finance Committee, including Chairman Lloyd Bentsen (D-Tex.), are co-sponsors.
Pryor and Chandler hope to get enough bipartisan support to have the bill, which covers many federal and private pension issues, as part of the budget reconciliation package.
There is no way now that U.S. retirees can avoid or delay paying taxes on their lump-sum pension payments. These payments average $30,000 but can be as much as $90,000. Federal retirees cannot put lump-sum payments into an IRA because the government doesn't consider that a full distribution of benefits since they will continue to get monthly lifetime pension payments. Private-sector retirees who get a lump-sum payment but no other pension payments can roll their lump-sum payments over into an IRA to delay taxes.Lump-Sum Tax Refunds
If federal retirees win their case before the U.S. Claims Court (Shimota v. U.S.), the government could be required to make more than $1 billion in tax refunds on lump-sum payments since 1987.
The case is being handled by the Washington law firm of Neill, Mullenholz & Shaw. It will likely be several years before it is settled, and probably will go to the Supreme Court.
Meanwhile retirees who want to file protective claims, in case the government loses the case, may file amended returns (Form 1040X) for the year or years they got lump-sum payments and paid taxes on them, according to the National Treasury Employees Union.
Important: Don't file the amended return until just before the deadline. Reason: Once the return is filed, the administrative clock starts on consideration of your claim. Should the Internal Revenue Service reject it before the final court ruling it could complicate your individual case. If you got the lump-sum payment in 1987, you don't file the amended return until just before the deadline, April 15, 1991.
NTEU says that the deadline for filing a protective claim for lump-sum payments received in 1988 is April 15, 1992. For those received in 1989, the deadline is April 15, 1993. "A cover letter should be included asking that your claim for refund be held until the Shimota case is settled (Case No. 106-89T, U.S. Claims Court). Send the return certified mail to the IRS office where you normally file your return," the union advises.
"Keep in mind that even if the Shimota case is successful," the union told members, "the IRS may not be obligated to rule favorably on other tax refund requests that have been submitted."