Tax Policy:

Taxation of Pension Income for Retired New Jersey Police and Firefighters

GGD-90-73BR: Published: Apr 13, 1990. Publicly Released: Apr 13, 1990.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) use of actuarial tables, focusing on: (1) the fairness of those tables in computing taxable pension income; and (2) an alternative income computation method that takes into account occupations and other factors.

GAO found that: (1) the estimated life expectancies for New Jersey police and firefighters were equal to those of the general population but shorter than those in the IRS tables; (2) using estimates of New Jersey police and firefighters' life expectancies instead of IRS tables reduced taxable pension income during initial retirement, followed by 1 or more years of increased taxable income; (3) the small tax savings did not warrant a separate table of life expectancies for police and firefighters; (4) using separate tables could complicate tax administration, set precedents for occupational and demographic groups, and confuse taxpayers; (5) taxes paid during initial retirement were the same despite the use of different tables; and (6) an IRS publication failed to clarify when the simplified general rule was to retirees' advantage.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS has changed wording in instructions for simplified general rule to indicate it is probably beneficial for those who qualify for it to use it. The distinction between those who know and those who do not know employer contributions has not been made.

    Recommendation: The Commissioner of Internal Revenue should revise IRS Publication 575 to clarify when retirees can use the simplified general rule to their advantage. If retirees do know their contributions made before and after July 1986, they should be instructed that the use of the simplified general rule may or may not be to their advantage. The publication should also instruct retirees, whose employers cannot separate the contributions they made, to use the simplified general rule because it is always to their advantage to do so.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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