Taxable Lump Sum Death Benefit Calculation from Federal Employees' Retirement System (FERS)

How much of the lump sum death payment is taxable?

1- $43500
2- $59000
3- $73000
4- $87000

Final answer:

Linda's late husband contributed $28,000 to FERS, which is not taxable. She received an $87,000 lump sum death benefit, so the taxable amount is the lump sum minus the contributions: $87,000 - $28,000 = $59,000.

The correct option is approximately option B

The question concerns the taxable amount of a lump sum death benefit received from the Federal Employees' Retirement System (FERS). When a person receives a lump sum as a death benefit, it includes both the contributions made by the employee to the retirement system and any additional death benefit paid by the government.

The part of the lump sum that represents the deceased employee's contributions to the retirement plan is considered a return of the employee's after-tax contributions and is not taxable. Any amount above these contributions is usually considered taxable income.

In Linda's case, her late husband's contributions to the FERS totaled $28,000, which means this amount would not be taxed upon his death. However, the total death benefit she elected to receive is $87,000 in a lump sum. To find out the taxable portion of this lump sum, we subtract the non-taxable contributions ($28,000) from the total amount ($87,000), which leaves us with $59,000. Consequently, the taxable amount of the lump sum death payment Linda received is $59,000.