CSRS retirees who retired before July 1, 1986 were permitted to recover
their before tax contributions immediately--typically recovery occurred
within 18 months or so. CSRS retirees who retired on or after July 1,
1986 were required to recover their after tax contributions over
time--the only method within scope is the simplified method.
So in your specific example there would be no remaining contributions to
recover because the retirement occurred in 1985.
As a more general answer to your question--if the retiree had retired on
or after July 1, 1986--the retiree or the surviving spouse is
responsible for maintaining a record of the recovery. In the absence of
that information the preparer has no basis to exclude any
contributions. Good practice for any site preparing a return for such
an individual is to print a copy of the 1099R sheet from TaxWise and
include it with the taxpayer's copy of the return. Specific annotations
as to the reasons for the treatment are helpful to the preparer next year.
Bob Schafer, TRS, PA1
Pub 721, page 23 confirms the treatment is right for a pre-1987 annuity start date.
TRS CA4 starting this April
There are several items that often are not addressed when using the Simplified Method.
There are three questions that need to be asked when seeing a 1099-R that even might require Simplified Method handling:
1) When did payments begin?
2) How old was the recipient at the time the payments began?
3) Was it a single or joint annuity (that's usually what they're called) and if so, how old were each of the principals?
If the payments began BEFORE July 1986, they almost always got their entire contribution amount back in the first three years after starting.
Apparently Congress decided that it was losing a lot of tax income that way, so they changed things. Sooo... If the payments began AFTER July 2, 1986, they are allowed to take a monthly exclusion for the rest of their lives!!!! Even after their own contributions are used up. And in the case of a joint annuity, the same monthly exclusion is allowed for the spouse.
Then apparently Congress realized that it was going to really lose out on a lot of tax income, and that's when we started tracking the contributions, and when they are used up by annual exclusions, the entire amount is taxable.
Items 2 & 3 above relate to how to calculate the monthly/annual exclusion. Once started, its only the first and that will have anything but 12 months, with the exception of year of death.
When its a joint annuity, and the taxpayer (for simplicity we'll call it HIM) dies, the current year's income & exclusion needs to be figured. Then the prior year amounts recovered PLUS his current year's exclusion (for whatever months) is put in as HER "prior amount recovered" and the exclusion continues.
Also, as mentioned, the exclusion is "taken or assumed to have been taken" and only 3 years returns can be amended.
Long-winded, I realize, but often forgetten items.