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Taxes-101  
#1 Posted : Tuesday, August 12, 2014 8:59:43 AM(UTC)
Taxes-101

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There was some discussion on this topic back in 2012.
It's now beginning to get some traction.
There is now a website on the issue: csrstax dot com
It's an important issue as 20 states break the same law.
It's going to court.

ISSUE SUMMARY

It is our the belief that the State of Virginia is unlawfully over taxing Federal CSRS Pensions.

Virginia exempts Social Security System income from its income tax while fully taxing 100% of CSRS pensions. In that CSRS Federal pension employees did not participate in the Social Security System, CSRS pensions are an alternate system that provides Financial Social Security for CSRS retirees. (CSRS was created 15 years prior to Social Security). A COMPARABLE tax deduction should be granted to CSRS pensioners.

1. Breach of Federal law (4 USC §111) allows states to tax Federal employees as long as the states do not discriminate against Federal Employees because of the source. Virginia is DISCRIMINATING against Federal CSRS pensioners.

2. Breach of Section 1; Amendment 14; U.S. Constitution: …The Equal Protection Clause of the 14th amendment of the U.S. Constitution prohibits states from denying any person within its jurisdiction the equal protection of the laws… By denying states the ability to discriminate, the equal protection clause of the Constitution is crucial to the protection of civil rights. … The laws of a state must treat an individual in the same manner as others in similar conditions and circumstances….
Bureaucratic  
#2 Posted : Tuesday, August 12, 2014 7:53:25 PM(UTC)
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Originally Posted by: Taxes-101 Go to Quoted Post
Breach of Federal law (4 USC §111) allows states to tax Federal employees as long as the states do not discriminate against Federal Employees because of the source. Virginia is DISCRIMINATING against Federal CSRS pensioners.


You do know that Virginia taxes state and local pensions as well as federal pensions. Also it does not tax any social security benefit no matter who the employer was. So, where's the discrimination?
SDAnalyst  
#3 Posted : Wednesday, August 13, 2014 1:06:53 PM(UTC)
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The answer is to move to a state that does not tax Federal or State pensions. Because Virginia has a high number of Federal retirees, they tax their pensions to get money to provide state services.
EngineerJim  
#4 Posted : Wednesday, August 20, 2014 6:52:07 AM(UTC)
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Originally Posted by: Taxes-101 Go to Quoted Post
There was some discussion on this topic back in 2012.
It's now beginning to get some traction.
There is now a website on the issue: csrstax dot com
It's an important issue as 20 states break the same law.
It's going to court.

ISSUE SUMMARY

It is our the belief that the State of Virginia is unlawfully over taxing Federal CSRS Pensions.

Virginia exempts Social Security System income from its income tax while fully taxing 100% of CSRS pensions.
I hope this gets fixed. I also believe that CSRS pensions should receive the same dollar amount (ie comparable) state tax exemption as Social Security benefits. For example, if a state exempts up to $2,000 per month of SS, it should exempt $2,000 per month of CSRS annuity/pension.

OUtside  
#5 Posted : Wednesday, August 20, 2014 2:09:22 PM(UTC)

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After looking briefly at the VA state income tax web site, I have two two comments on this discussion.

It's not correct to say VA taxes CSRS pension fully at 100% because the taxpayer reduces AGI by his recovery of amount invested in the pension (Safe Harbor, etc) which would reduce taxable income below 100%.

Second, in addition, VA allows age 65+ deduction of $12000 for each retiree, this together with standard deduction, exemptions, and basic income threshold taxable for a retired couple means the couple would pay no state income taxes for income well up into the $50 thousands per year.

Not exactly putting the hurt on for many retirees, it seems to me.

Edited by user Wednesday, August 20, 2014 3:01:02 PM(UTC)  | Reason: Not specified

EngineerJim  
#6 Posted : Sunday, August 24, 2014 4:15:32 PM(UTC)
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Originally Posted by: OUtside Go to Quoted Post
After looking briefly at the VA state income tax web site, I have two two comments on this discussion.

It's not correct to say VA taxes CSRS pension fully at 100% because the taxpayer reduces AGI by his recovery of amount invested in the pension (Safe Harbor, etc) which would reduce taxable income below 100%.
That is correct. But realistically using the IRS Simplified Method, 93% of CSRS pension is taxable. That is close to 100%.
Quote:

Second, in addition, VA allows age 65+ deduction of $12000 for each retiree, this together with standard deduction, exemptions, and basic income threshold taxable for a retired couple means the couple would pay no state income taxes for income well up into the $50 thousands per year.
This is also allowed for private sector retirees, plus they pay zero on Social Security. This last point is the entire point of the topic. CSRS get less deduction than others (including FERS retirees). And it is worse (almost double) for single retirees than married ones.

Edited by user Sunday, August 24, 2014 4:18:17 PM(UTC)  | Reason: Not specified

restonham  
#7 Posted : Sunday, August 24, 2014 7:54:01 PM(UTC)

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As far as VA is concerned, this is a dead issue. The law does not allow states to treat pensions of federal and state employees differently. VA made the choice to tax all, NY made the opposite decision - federal, military, state and local pensions are all state tax exempt. Trying to change this in court is a waste of time and money. The only way is to lobby your state senators and representatives to change VA law. Short of that, nothing is going to happen.

The comparison of SS to CSRS isn't valid. SS is primarily a social wealth transfer program. CSRS, FERS and military retirement are earned retirement benefits. While it may not be fair in outcomes, it's actually possible for someone to get SS benefits without ever paying in a dime - or even working. And, about half of CSRS retirees end up receiving SS due to work before, during or after they retire.

Moving to a state that has no income tax, exempts federal pensions or allows a significant tax credit for them are the only viable solutions. Trying to fight this in court is like sailing into the wind and shouting for it to stop. It ain't gonna happen.

I live in VA, and until I find a better place to live, I'll pay the tax and figure it could always be worse.
OUtside  
#8 Posted : Sunday, August 24, 2014 8:00:14 PM(UTC)

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I see what you are saying and won't take too much exception except:

When someone says 'fully 100%,' that means entirely without exception, except it turns out not fully nor 100% but something less, as you point out.

If you are going to make the one for one comparison CSRS to private industry or FERS, that would open it up to comparing all benefits such as CSRS can retire at a younger age and CSRS probably has the better health benefits cheaper and possibly some other things. I'm CSRS, so I am not complaining, but did not transfer to FERS years ago when I had the chance.
restonham  
#9 Posted : Sunday, August 24, 2014 8:28:44 PM(UTC)

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I never made the change either and I don't regret it. I'm not comparing to private industry, only other state and local employees. I get some SS due to military time and post retirement work, but I do pay the WEP reduction. But none of my SS is taxed in VA. My wife was always in the private sector and hers is much higher than mine and also not taxed. But she has no pension, especially one as generous as we have with the now nearly extinct CSRS.
Taxes-101  
#10 Posted : Thursday, August 28, 2014 6:50:02 AM(UTC)
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Lots of good comments here.
I'll try to answer the questions:
1. Where's the Discrimination: Virginia State employees have a 2 part system: Pension and Social security. The Social Security segment is exempted from income tax (about 30% of total). CSRS is a one part system... with no Comparable exemption.
2. The $12,000 exemption for being 65 is means tested. Many don't get it. Social Security is not means tested. Even Billionaires get it tax free!
3. Fed employees' contributions are exempted as a factor. But Virginia State retirees get that too.

I have a 30 page power point presentation that answers about everything imaginable. If you want it, email me using the email address posted on the website and I'll send it to you.... csrstax dot com.

This issue is not a dead horse and long as the horse is still unlawfully taxing CSRS pensions. : )
hustonj  
#11 Posted : Thursday, August 28, 2014 7:01:17 AM(UTC)
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An importnat correction to your point:

The CSRS Pensions are being taxed in accordance with the law and under the direction of the law. You admit so yourself. The application of that law may or may not be immoral and misguided, and that's what you need to be proving.

Claiming that the tax violates the law is a losing argument. Claiming that it violates the INTENT of the law is a potentially winnnig argument.

Remove your emotions from the thought process to the best of your ability, or they will help you build your own defeat into a legal case.
restonham  
#12 Posted : Thursday, August 28, 2014 8:00:52 AM(UTC)

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Taxes101- Here are my responses to your responses to previous responses:

1. Where's the Discrimination: Virginia State employees have a 2 part system: Pension and Social security. The Social Security segment is exempted from income tax (about 30% of total). CSRS is a one part system... with no Comparable exemption.

CSRS is as many parts of a system as you want it to be. Virtually all CSRS retirees for the past 15 to 20 years have TSP accounts that are fully taxable - just like a regular IRA. It's hard to find recent studies on the number of current CSRS retirees who receive SS in addition to CSRS, but the number is higher now than in the past. For those CSRS employees who retire with 42 years of service, there are probably very few. However, the vast majority of CSRS retirees I know (yes, that's anecdotal info) retired before age 60 and took second jobs that qualified them for SS. We all will be exempt from VA tax on our SS annuities. CSRS is NOT comparable to SS - it is MUCH more generous, especially for those with a high three over the SS maximum earnings income level.

2. The $12,000 exemption for being 65 is means tested. Many don't get it. Social Security is not means tested. Even Billionaires get it tax free!

Don't understand your point - the exemption is means tested for everyone.

3. Fed employees' contributions are exempted as a factor. But Virginia State retirees get that too.

OK, again, we are all equal, so what's your point?

It is beating a dead horse - as I said before, VA had an option to tax no federal, state or local benefits or tax all. It decided to tax all. The only way to change this is for VA to pass a law exempting all of the above. VA is in compliance with current federal law. Your arguments. as mentioned by hustonj, are indeed based on emotion, not logic or law. You need to find someplace else to channel your energy and emotions. How about fighting against chained COLAs? That will be far more detrimental to all federal retirees and SS recipients that the VA tax.
Taxes-101  
#13 Posted : Thursday, August 28, 2014 10:06:11 AM(UTC)
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Restonham, Looks like this issue got your attention!
If you would, send me an email thru the email address on the website: csrstax dot com. I’ll send you the Power Point presentation. It’s about 30 pages and explains a lot. It’s quite interesting too… lots of amazing history. In the end we may simply agree to disagree. But it keeps things interesting. It is a complex issue with where there are lots of opinions.

restonham: A. …Virtually all CSRS retirees for the past 15 to 20 years have TSP accounts that are fully taxable - just like a regular IRA…
Taxes-101: Yes and so do state employees. It’s not an issue.

restonham: B. … CSRS retirees who receive SS in addition to CSRS…
Taxes-101: That is correct. And it is good point! Many CSRS retirees receive. But it’s a different social security reduced by WEP and based on less than lifetime earnings (which SS uses). The key is that CSRS pensions should be given a COMPARABLE exemption. The SS garnered via a short number of years and then reduced by 60% per WEP is hardly comparable. Comparable must be computed using like factors. And it is not. This is where the discrimination aspect exists.

restonham: C. CSRS is NOT comparable to SS - it is MUCH more generous…
Taxes-101: CSRS is essentially an Alternate Social Security (this comment disturbs some people). There are many others Alternate Systems even within the State of Virginia run by Virginia’s municipalities (e.g. Fairfax County police employees). They are generally referred to as “218 plans.” Participates in the 218 Systems do not pay into SS. The qualification for such plans (as judged by the Federal IRS) is that they must have “equal to or better benefits (more generous) than Social Security.” So Alternate Systems are not a new idea. The decision not to cover CSRS employees with SS was made in 1935 when SS was being created… as CSRS already provided equal or better benefits (CSRS created in 1921). The fact that it is more generous will not affect computation of a Comparable exemption.

restonham: D. …Don't understand your point [on the 12,000 over 65 exemption] - the exemption is means tested for everyone.
Taxes-101: Yes, like treatment. It’s not an issue. (Not sure if the state includes tax exempt SS in making the determination for “low income”). If so, then it is an issue.

restonham: E. Fed employees' contributions are exempted as a factor [as are Virginia employee contributions] OK, again, we are all equal, so what's your point?
Taxes-101 No point to make. It’s like treatment and not an issue

restonham: F. It is beating a dead horse - as I said before, VA had an option to tax no federal, state or local benefits or tax all. It decided to tax all. The only way to change this is for VA to pass a law exempting all of the above. VA is in compliance with current federal law…
Taxes-101: I do not agree. The state is giving significant tax exemptions for SS to state employees and many many others based on formulas that uses participation in SS during a working life time. The same should apply to CSRS.

restonham: G. … argument base on emotion…
Taxes-101: Not so. It is based on discrimination due to the source which is prohibited by 4 U.S.C 411. That is, that CSRS pensions are not granted a comparable exemption as computed using the same factors as it has no working-life-time equivalent to that of the preferential social security component of others.
restonham  
#14 Posted : Thursday, August 28, 2014 1:12:50 PM(UTC)

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Taxes-101- I have changed my mind. This is not a VA issue at all. What you are saying is discrimination applies to every other state that taxes CSRS as well as state and local pensions but not SS. There is no law to change in VA - what is needed to address your concerns is a federal statute interpretation that expressly defines CSRS (and maybe even the FERS component) as the equivalent of SS for purposes of state taxation. I looked at your website, csrstax.com and I no longer see this as a specific state matter. If one state is violating the law (and I'm not saying any are), and it is a multi-state law, then Congress needs to clearly state that 4 U.S. Code § 111 was to prevent the taxation of federal pensions as an alternative to SS (state employees are out of luck). This can be done in an intent of Congress issuance. This happens all the time now - Congress issues guidance with new laws that makes clear their intent so those implementing the law don't miss the point.

I'm not a lawyer, but I have many years interpreting and implementing federal laws and statutes. I still believe your efforts to remedy this at the state level will not succeed. If there is any remedy, and I'm not qualified to say if there is or isn't, it needs to be at the federal level.

Or, we can move to states that either have no income tax or exempt federal pensions, social security and TSP/IRA proceeds. That's a very short list and only one of the states, Washington, has what I consider a desirable climate. But it's way too far away from our kids.
Taxes-101  
#15 Posted : Friday, August 29, 2014 5:20:50 AM(UTC)
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Restonham, You are absolutely correct! There are 28 states that do the same thing… exempting SS from their income tax but fully tax 100% of Fed CSRS pensions. And you are right again that it likely should be moved to a Federal court as it is a 28-state national issue. We have discussed this very issue internally.. that is, State Court vs. Federal Court. But if I am the plaintiff at the kick off, I can complain only about Virginia as Virginia is the only state acting against me. To make it a multi-state issue we would need CSRS pensioners in other states to join the suit, then file in Federal Court. As you might imagine, in that scenario this issue would quickly become a hornet’s nest of controversy and national media coverage. In the past Virginia case (settled in the early 1990’s) the state decided to also tax Virginia state pensions so that it taxed both State and Fed penions. But in what I deem a slight-of- hand-move by the state, it gave its state retirees a 5% bump up in their pensions to pay the tax. Then sent the bill for the bump-up to CSRS pensioners and others in the state. So, did state retirees really begin paying the tax? If the state loses the case, it might begin taxing all SS with a means test. But there are 1.3 million social security recipients in Virginia (that number astounds me… it is 16% of the state population and 23% of the adult population!). So there will be a howl 1.3 million people loud! For the state, it would have to politically measure the Howl against the much smaller 80,000 CSRS retirees in Virginia (Virginia has more Fed retirees than any other state). The state could give those 80,000 a tax break as it would be temporary and declining in value yearly as the number of CSRS retirees is shrinking. In approximately 22 years the number of CSRS retirees will be statistically insignificant. They are ageing and departing the world, and few to none new CSRS retirees are being added (as of 2014, still working CSRS covered Fed’s are only 5% vs. 95% FERS covered… and 20% of Fed retirees are FERS).
restonham  
#16 Posted : Friday, August 29, 2014 6:09:56 AM(UTC)

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Taxes101- Good luck in your quest. I fear that the 80K CSRS retirees will have diminished significantly by the time this case is won, settled or lost.
OUtside  
#17 Posted : Friday, August 29, 2014 6:23:23 AM(UTC)

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With the generous age deduction for the elderly, etc as mentioned above, how much state income taxes do you think those 80,000 CSRS retirees pay?
restonham  
#18 Posted : Friday, August 29, 2014 8:33:25 AM(UTC)

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Unless you were born before 1940, you need to have an AGI of less than $75K for married couples to take advantage of the $12K senior per person deduction. Over age 75 you get the deduction with no AGI test. The $12K is reduced dollar for dollar for each dollar of AGI over $75K. Most VA CSRS federal retirees live in Northern VA, meaning, they were at the higher end of the salary scale when they retired, and many were 2 fed income couples. I doubt there are that many that have AGIs lower than $87K, which means they will pay the full percentage of VA state income tax. I think the state is greedy enough to fight for that income, though it's a very small percentage of total income tax. I hope I am wrong, but states tend to covet their sources of income more than Don Corleone.
Taxes-101  
#19 Posted : Friday, August 29, 2014 8:35:03 AM(UTC)
Taxes-101

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OUtside:
How much Virginia Income Tax is paid by CSRS Pensioners:

Average (2014) CSRS pension is $38,000. Estimated state income tax paid per pensioner: $2,000
X 80,000 CSRS pensioners = $160,000,000 ($160 million per year). But let’s assume that's off by 20%. The number is then $128,000,000 ($128 million).

BUT the real point is that CSRS taxes are 40% higher than those who make the same total retirement income when their Social Security segment is exempted… that includes FERS pensions with an equal FERS pension + Social Security. So even the two Federal retirement systems are tax differently.
Taxes-101  
#20 Posted : Friday, August 29, 2014 8:41:45 AM(UTC)
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NARFE Springfield Virginia Presentation:

There is a possibility that the 32 page Power Point presentation on this topic will be given at the Springfield NARFE Chapter in mid September 2014. It answers lots of questions, gives background and history. It will be entertaining at the least!
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