Tax Type
Individual Income Tax
Description
FEDERAL RETIREE SETTLEMENT LEGISLATION
Topic
Exemptions
Date Issued
07-13-1994
FEDERAL RETIREE SETTLEMENT LEGISLATION
Governor George Allen today signed into law legislation (SB 2008) enacted by the General Assembly to provide a settlement for individual income taxes paid on federal retirement income received during taxable years 1985-1988. These taxes are at issue in Harper v. Virginia Department of Taxation which is currently in litigation.
Terms of Legislation
The legislation provides for a $340 million settlement to federal retirees payable over a five-year period. The settlement will be funded by five appropriations, the first of which will be made on or before July 15, 1994. The total amount of the settlement payments for each federal retiree who accepts a settlement offer will depend on the overall responses of federal retirees to a notice that will be mailed shortly.
The legislation requires a two-step process. First, on August 1, 1994, the Department of Taxation will mail notices and forms to over 175,000 federal retirees who have been identified from information furnished by the federal Department of Defense and Office of Personnel Management and other sources. A public notification campaign will also be undertaken for federal retirees or their survivors who are not reached by direct mail. Retirees must respond to the Department of Taxation on or before November 1, 1994. Second, in a December 15, 1994 mailing, those retirees who responded in a timely manner to the first notice will be offered the opportunity to accept a settlement, agree to be bound by the final decision reached in existing litigation, or file their own court action.
Process
Computation of 1985-1988 Disputed Tax Overpayments
The Department of Taxation has recomputed the taxes owed by most federal retirees for taxable years 1985-1988 by excluding the retiree's federal pension/annuity from the taxable income shown on their original returns for those years. This amount was compared to the taxes actually paid for those years to determine the amount of each retiree's overpayment. When it was to the retiree's advantage, the department adjusted the filing status and allocation of exemptions and deductions to maximize the potential overpayments.
In recomputing the overpayment amount, the department excluded the pension amount as reported by the federal payer from the Virginia taxable income reported on returns for 1985, 1986, 1987 and 1988.
In some situations, not all of a retiree's gross pension amount received from a federal payer was subject to income tax. In such situations, the retiree must provide the department with the amount of pension income that was subject to tax for federal purposes so that the correct overpayment amount can be calculated.
Forms
The Department of Taxation has developed the following forms for use by the federal retirees:
Form FR 1 - Virginia Department of Taxation Computation of Overpayment Amount
Form FR 2 - Retiree's Computation of Overpayment Amount
Form FR 4 - Computation of Overpayment Amount (blank form for retirees who did not
receive preprinted forms with their computations of overpayments)
First Notice
On August 1, 1994 the Department of Taxation will mail tax overpayment notices and forms to over 175,000 federal retirees and begin a public notification campaign to advise all affected federal retirees of this legislation. For most retirees, this notice will include the amount of tax overpayments for 1985-1988 that were computed by the department.
Retirees who receive the first notice in the mail from the Department of Taxation (accompanied by copies of Form FRI and Form FR2), should check the computations.
• If they agree with the computations, they should complete Form FR1 and return it to the
Department of Taxation no later than November 1, 1994.
• If they disagree with the computations, or their pension/annuity amount on Form FR1 is incorrect, they should complete Form FR2 and return it to the Department of Taxation no later than November 1, 1994. If the retiree wishes, the Department of Taxation will recompute the taxes for retirees who file Form FR2. In either case, the retiree must sign the Form FR2 and furnish a Form W-2P issued by the federal retirement system or other information provided by their former employer that states the amount of pension or annuity payments for the years 1985-1988.
Whether retirees agree or disagree with the computation, they must respond to the first notice and file the appropriate form with the Department of Taxation on or before November 1, 1994, or they will lose all rights to recover any Virginia taxes paid on federal retirement income received in taxable years 1985-1988, including the right to sue. This applies even if a retiree previously filed an amended return with the Department of Taxation requesting a refund.
When Retiree Does Not Receive First Notice
Blank forms (Form FR4) will be available on August 1, 1994 for any retiree who does not receive the first notice in the mail. The blank forms will be available from many retiree organizations, state and local government offices, or the Department of Taxation. The department will accept information from a Form W-2P issued by a federal retirement system or other information from their former employer that states the pension or annuity payments for the years 1985-1988. Retirees may recompute their taxes for each year by excluding the amount of taxable federal retirement benefits previously reported each year. The Department of Taxation will recompute the taxes for retirees if provided with the pension information on Form FR4 no later than November 1, 1994. A response is necessary (on FR1, FR2 or FR4) by November 1, 1994 in order to preserve the retiree's rights.
Second Notice - Final Settlement Offer
The final settlement offer will be mailed by the Department of Taxation on December 15, 1994 to all retirees who responded in a timely manner to the first notice. This second notice will specify the amount of the settlement offer made to each retiree. The Department of Taxation will also provide instructions about accepting or declining the offer. To participate in the settlement program, retirees must return a signed settlement agreement and release to the Department of Taxation by February 1, 1995. Retirees who wish to pursue litigation must return an agreement to be bound by existing litigation or file their own lawsuit by February 1, 1995.
IMPORTANT REMINDER: Failure to meet the November 1,1994 deadline will forever bar a federal retiree from initiation of any action to recover Virginia taxes paid with respect to the retirement or pension benefits received from a federal retirement system created by the federal government for any officer or employee of the United States, including the United States Civil Service, the United States Armed Forces, or any agency or subdivision thereof for any taxable year beginning on or after January 1,1985, and ending on or before December 31,1988. A federal retiree must respond even if he already filed an amended return or returns with the Department of Taxation claiming a refund for those years.
If you have any questions or need help in completing the necessary forms related to the settlement offer, you may call the Department of Taxation for assistance at:
1-800-730-8730
(804) 367-2601 (local Richmond area)
or
Write to the Department:
Federal Retiree Settlement Administration
P. O. Box 5126
Richmond, VA 23220-0126
(804) 367-2601 (local Richmond area)
or
Write to the Department:
Federal Retiree Settlement Administration
P. O. Box 5126
Richmond, VA 23220-0126
AGE DEDUCTION MODIFICATION
The legislation enacted by the General Assembly and signed by the Governor also contains modifications to the current age deduction. For taxable year 1994, the age deduction for those 65 and over is $12,944, and for those age 62-64 the age deduction is $6,472. For 1994, these amounts will continue to be reduced by social security or railroad retirement benefits received.
For taxable year 1995, the age deduction for those age 65 and over will be $10,000, and for those age 62-64 the age deduction will be $5,000. These amounts are not reduced by social security or railroad retirement benefits received.
For taxable years beginning on or after January 1, 1996, the age deduction for those age 65 and over will be $12,000, and for those age 62-64 the age deduction will be $6,000. These amounts will not be reduced by social security or railroad retirement benefits received nor will they be indexed for inflation in future years.
KEY DATES IN THE SETTLEMENT PLAN
August 1, 1994 TAX Mails Tax Overpayment Notices to Retirees
TAX Begins Public Notification Program for Retirees Who Do Not
Receive Mailing
November 1, 1994 DEADLINE FOR RETIREES RESPONSE TO NOTICE
All retirees must file Form FRI, FR2, or FR4 with TAX to preserve their rights to recover any Virginia taxes paid on federal retirement income for taxable years 1985-1988
December 15, 1994 TAX Mails Final Settlement Offer to Retirees Who Responded to First
Notice
February 1, 1995 DEADLINE FOR RETIREES TO ACCEPT SETTLEMENT, CHOOSE TO BE BOUND BY EXISTING LITIGATION OR FILE THEIR OWN LAWSUIT
March 31, 1995 First Checks Mailed to Participating Retirees
IMPORTANT TELEPHONE NUMBERS FOR RETIREE INFORMATION:
Outside the Richmond Area 1-800-730-8730
In Richmond 367-2601
FORMS WILL BE AVAILABLE IN THE FOLLOWING LOCATIONS AFTER AUGUST 1:
Virginia Department of Taxation, Richmond and district offices located in:
Northern Virginia (703) 534-5791
Norfolk (804) 455-3810
Hampton (804) 594-7482
Harrisonburg (703) 434-1768
Bristol (703) 466-3412
Roanoke (703) 562-3510
Danville (804) 791-5244
Richmond: Federal Retiree Settlement Administration, P. O.
Box 5126 Richmond, VA 23220-0126
Federal Retiree Organizations
Local Commissioners, of Revenue
Rulings of the Tax Commissioner