allowable credit is the smaller of this amount or the balance of tax after deducting any dividends received as credit.

A retirement income credit may also be available to a wife in her own right. Credits may be available to both husband and wife on their community income if they are domiciled in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, or Washington). An unremarried surviving spouse may qualify under the "10 year, $600” earned income tests on the earned income of his or her deceased spouse or on their combined earned income. The credit is not allowable to a person who is a non-resident alien at any time during the taxable year.

The Finance Center does not apply the retirement credit when withholding taxes. Each taxpayer must claim the credit on his income tax return if it is to be allowed. Consult the instructions accompanying Federal income tax returns, or your local District Director of Internal Revenue, for assistance with special problems.

The lump-sum payment of $2,000 received upon retirement by officers not recommended for continuation on the active list under the so-called "Hump Act" (10 USC 5701 note) is includible in gross income in full, and subject to withholding of taxes, in the year when received.

III. ALLOTMENTS

A. ALLOTMENTS PERMITTED

You may register allotments of retired pay only for the payment of premiums of life insurance on your own life, including group type insurance plans. You may NOT register an allotment solely for the payment of premiums on anyone else's life.

If you registered insurance allotments while on active duty, they will remain in effect when you go into the Fleet Reserve or on retired status, and they will continue to be automatically deducted from your retired pay unless you stop or change them.

B. CHANGE OF ALLOTMENT

If you want to stop or change insurance allotments already registered and do not have access to printed forms, you may send an informal letter over your signature to the Navy Finance Center requesting either the registration or discontinuance of allotments. Requests by telegraph or telephone cannot be accepted.

1. Requests for New or Changed Allotments. Mail signed request for new or changed allotments so that the Navy Finance Center will receive it by the 25th day of the month preceding the month in which the first deduction is to be made. Payment for the month of the first deduction will be made at the end of the month.

2. Requests for Discontinuance of Allotments. Mail signed request for discontinuance of allotments so that the Navy Finance Center will receive it by the 25th day of the last month in which deductions are to be made.

3. Information Required by Navy Finance Center. In writing the Center, state the monthly amount of the allotment, the month of the first (or last) deduction from pay, and the name of the payee. On all Government and National Service Life Insurance premiums, the payee is the Veterans Administration District Office, P. O. Box 7787, Philadelphia 1, Pennsylvania. On commercial insurance, the company is the payee; state its full name and home office address.

4. Effective Date of Change. Allotments will remain in effect until the Navy Finance Center receives notice of change.

C. RENEWAL OF NATIONAL SERVICE LIFE INSURANCE AND GOVERNMENT INSURANCE

Ordinarily the Veterans Administration, three months in advance of the effective date of renewal, furnishes the Navy Finance Center with a notice of renewal of National Service Life Insurance term insurance and U.S. Government Insurance from former premium rates to current age rates. The Navy Finance Center, in turn furnishes the retired member concerned with the VA certificate of renewal and also with a letter of explanation containing an endorsement for the member's use as desired. If you wish to authorize an increased allotment, or to discontinue the old allotment, in the event that you no longer want the insurance, you must endorse the letter and return it to the Navy Finance Center. The Center can take no action until it receives the letter endorsed by you.

IV. UNIFORMED SERVICES CONTINGENCY OPTION ACT13

A. PROVISIONS OF THE ACT

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1. General. The Uniformed Services Contingency Option Act13 provides that members of the uniformed services may elect, within specific deadlines, amounts of retired or retainer pay' awarded them as a result of such service, in order to provide annuities payable, after their deaths in retired or Fleet Reserve status, to surviving eligible beneficiaries.

2. Explanation of Options. Careful consideration should be given to the election of one of the first three available options listed below, each of which may be coupled with Option 4: Option 1 - Provides an annuity for the widow alone until her death or remarriage.

Option 2 Provides an annuity for the member's children only.

Option 3 Provides an annuity payable to the family as a unit; that is, it is for the benefit of the widow and unmarried children under 18, but terminates on the death or remarriage of the widow, or, if later, when all the children have reached 18.

Option 4 - May be elected in combination with any one of the other options and provides for discontinuing the reductions in retired pay if the members' beneficiaries predecease him or otherwise become ineligible. Adding Option 4 increases the cost but guards against a lifelong reduction in retired pay in a situation where the retired member outlives his beneficiaries.

Any of the first three options, with or without Option 4 added, may be elected to provide for an annuity in the amount of one-eighth or one-fourth or one-half of the reduced retired pay. The Rights and Benefits Office at each naval activity is prepared to answer Contingency Option questions.

B. DEADLINES FOR ELECTIONS

1. Members of the U.S. Navy and of the U.S. Naval Reserve on active duty are entitled to make elections under the Uniformed Services Contingency Option Act (USCOA) not later than the dates on which they complete 18 years of service which is creditable in the computation of active duty pay. 2. Members of the U.S. Navy and of the U.S. Naval Reserve who are awarded retired pay for physical disability prior to the completion of 18 years service are entitled to make elections not later than 30 days after their receipt of official notice of award of retired pay.

3. Naval Reserve Personnel on Inactive Duty who have completed 17 years service for basic pay purposes should be contacted by their Commanding Officer regarding the elections. However, notification is not required and interested individuals will find information regarding making an election under USCOA in BuPers Instructions (1750.1C series).

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10 USC 1431. (Proposed legislation, if enacted, will change the title of Act to read: "Retired Serviceman's Protection Act.")

Retired pay as used hereafter in this section includes retainer pay

C. ELIGIBLE BENEFICIARIES

1. A member may elect benefits for his lawful spouse and for his legitimate children, unmarried and under 18 years of age. He may also elect benefits for a legitimate child over 18 years of age and incapable of self-support due to mental or physical disability, if that disability existed prior to the child's attainment of age 18. "Child" includes the following:

a. A stepchild who is dependent upon the member for over one-half of his or her support. A "stepchild" is a child by a former marriage of the member's spouse. Such a child ceases to be an eligible beneficiary if the member's marriage to the child's parent is terminated by divorce or annulment.

b. A child legally adopted by the member.

2. When the member is retired with pay, his election becomes effective and the beneficiaries will be the lawful spouse, or children or both who met the above listed qualifications, as applicable, on the effective date of retirement. The spouse on the date of the member's retirement, may not necessarily be the spouse at the time the election was made. Dependents acquired AFTER the date of retirement do NOT become eligible to receive annuities upon the death of the member.

D. MODIFICATIONS AND REVOCATIONS OF ELECTIONS

1. Prior to retirement with pay a member may modify or revoke his election at any time, but if the member is awarded retired pay within five years after such modification or revocation, it will not become effective; the original election, or the modification made at least five years prior to retirement with pay becomes effective. A member may not change or withdraw a revocation.

2. After retirement with pay a member may modify or revoke his election only under the following circumstances:

a. If a member on the Temporary Disability Retired List is found fit for duty, removed from that list and returned to active duty; he may continue his election as previously made, or he may modify or revoke it. However, the modification or revocation will not become effective if he is awarded retired pay within five years after the modification or revocation request. If the member is awarded retired pay, the election in effect at the time of his removal from the Temporary Disability Retired List again becomes effective, unless the member, while on active duty, requested a modification or revocation and such request was made five years prior to his retirement with pay.

b. If a member is mentally incompetent at the time he is required to make an election under the USCOA, his spouse or the legal representative of his children, if he has no spouse, may ask the Secretary of the Navy to make an election on behalf of the member. When the member regains his mental competency, he may modify or revoke the election made by the Secretary of the Navy. However, such request must be postmarked not later than 180 days after the member is determined to be mentally competent by medical officers of the Veterans Administration, or is adjudged mentally competent by a court of competent jurisdiction. No adjustment will be made in the reductions for the election made by the Secretary of the Navy.

E. REDUCTION IN RETIRED PAY

1. Method of Computation. The monthly reduction will be computed in each individual case by the Navy Finance Center using the actuarial (cost) tables in effect on the date of retirement with pay. It will be based on his election on the ages of the member and of his beneficiaries on that date and on the member's gross retired pay as of that date.

2. Starting Date. Reductions begin on the effective date of the member's retirement with pay. SEE NOTE on page 26.

3. Payroll Procedures.

a. Reductions in Retired Pay. Once a member is retired his election remains in effect each month during his lifetime, except under conditions set forth in paragraph F. The taxable amount by which retired pay is reduced is included in gross income for Federal withholding tax purposes.

During any periods in which the members are not entitled to retired pay, monthly payments must be made as set forth in the succeeding sub-paragraphs.

b. Direct Remittances. When retired members waive all or a portion of their retired pay to accept payments from the Veterans Administration, or when retired payments are reduced or suspended, they are required to forward monthly remittances if the balance of retired pay is insufficient to cover the USCO Act reduction. Remittances may be in the form of personal checks, money orders or bank drafts payable to the Treasurer of the United States. The notation "USCO" must be placed in the lower left-hand corner of each remittance to identify it. Remittances are due on the last day of each month. If remittances are not made when due, compound interest will be added thereto and survivors will not be eligible for annuities until the arrears with compound interest have been paid. Members who are required to make such direct remittances will be notified and furnished full instructions by the U.S. Navy Finance Center.

c. "U" Allotment. When permanently retired members are recalled to active duty, or are retained on active duty after retirement or transfer to the Fleet Reserve, they are required to make monthly remittances to cover the reduction attributable to the option(s) elected. Remittances may be made by means of allotments of active duty pay. Such allotments are called "U" allotments. In these cases the U.S. Navy Finance Center will automatically furnish each member concerned allotment authorization (NAVSANDA Form 545) for signature and forwarding to his active duty disbursing officer.

F. TERMINATION AND REFUND OF "COSTS"

After a member is awarded retired pay, his election remains in effect each month during his lifetime, except under the following circumstances:

1. If option 4 was combined with the option(s) elected, reductions terminate when there is no eligible beneficiary under the option(s) with which option 4 was combined. No further reductions will be made in the retired pay of the member, commencing with the first day of the month following the month in which there was no beneficiary eligible to receive an annuity. It is important to note that if a member has selected option 1, 2, or 3, without inclusion of option 4, the reduction in retired pay remains in effect until his death regardless of the ineligibility of his beneficiaries. When a member who elected option 4 ceases to have an eligible beneficiary, he should promptly notify the Commanding Officer, U.S. Navy Finance Center, Retired Pay Department, Cleveland 14, Ohio.

2. If a member revokes an election made on his behalf by the Secretary of the Navy under conditions set forth in paragraph D2b, reductions terminate the day prior to the date of his request for revocation. However, no portion of the reduction for the period the election was in effect will be refunded.

3. If a member is removed from the Temporary Disability Retired List for any reason other than permanent retirement, reductions for his USCO election terminate. USCO reductions in excess of the cost of term insurance for the period the election was in effect will be refunded.

4. If a member is discharged or resigns from the Retired List or from the Fleet Reserve, benefits under the USCO Act cease and reductions terminate, but no portion thereof, for the period the election was in effect, will be refunded. The member will not be permitted to deposit, in the U.S. Treasury an amount by which his retired pay would have been reduced so as to entitle his beneficiaries to the benefits of the Act.

G. PAYMENT OF ANNUITIES

1. Eligible Beneficiaries. Those dependents for whom benefits were elected and who met the applicable qualifications set forth in paragraph C become eligible to receive annuity payments, provided they are living and still meet the necessary qualifications on the date of the member's death. 2. Method of Applying for Annuity Payments. Survivors of a member who has made an election under this Act need not obtain legal assistance in collecting annuities upon the death of the member. Upon receipt of notice of a member's death, the U.S. Navy Finance Center will furnish the eligible survivor a DD Form 768, "Application for Annuity under USCO Act," unless a legal guardian has to

be appointed to receive the annuities. In this event an application form will be furnished the guardian upon receipt of a copy of the court order appointing the guardian. If the eligible survivor is a child and appointment of a guardian is not required, an application form will be furnished to the person who has care, custody and control of the child.

3. Payment Information. All annuities payable under this Act will accrue and be payable from the first day of the month in which the member dies and in equal monthly installments thereafter as long as entitlement exists. Payments will be made by the U.S. Navy Finance Center. No annuity will accrue or be paid for the month in which entitlement to annuity terminates.

4. Termination of Payments. An annuity due on behalf of a widow or widower will terminate only upon her or his death or remarriage. An annuity due on behalf of a child or children will terminate as of the last day of the month preceding that in which the youngest child annuitant attains the age of 18, or marries, whichever first occurs, or dies, unless the annuitant is a mentally or physically incapacitated child over 18 years of age and this condition existed prior to attaining 18 years of age. In this event, annuity payments will terminate as of the last day of the month preceding that in which he or she recovers from the disability, or marries, whichever first occurs, or dies. The full amount of the annuity established by an option elected on behalf of children is payable until the last child becomes ineligible for payment.

H. TAX INFORMATION

1. Reporting Annuities. Annuities received under USCOA must be reported on Federal income tax returns. The Internal Revenue Service, however, will allow a portion of the amounts received to be excluded from gross income, such amounts being contingent upon the life expectancy of the eligible beneficiary and the aggregated reductions in retired pay. The total amount by which retired pay was reduced is divided by the life expectancy of the eligible beneficiary to determine the annual exclusion from gross income. For example, if through a period of years the reductions in retired pay total $6000 and the life expectancy of the widow is 8 years, then $750 ($6000 ÷ 8) can be excluded annually from her annuity. If the widow receives $100 a month ($1200 a year), $750 will be excluded, leaving a balance of $450 which must be included annually in gross income. The percentage amount to be excluded will remain constant as long as the annuitant lives. Life expectancy of the annuitant is determined from actuarial tables provided by the Internal Revenue Service for the Finance Center. 2. Tax Statement Furnished. Information relative to the aggregate reductions will be furnished at the time annuity payments start. Shortly after the end of each calendar year each eligible beneficiary will be furnished a statement on Treasury Department Form 1099 showing the amount of annuity paid during the preceding calendar year, for use in preparation of Federal income tax returns. No tax will be withheld from annuity payments except in the case of non-resident aliens. The Internal Revenue Code 15 requires withholding of a flat 30 percent of the amount included in gross income in the case of non-resident aliens. At the end of each calendar year each non-resident alien annuitant will be furnished a statement showing the total of annuity payments and tax withheld. Any inquiries relative to Federal estate taxes on annuities, as well as any assistance needed in determining the amount excludable from gross income, or in preparing Federal income tax returns, should be obtained from the local Director of Internal Revenue.

V. MISCELLANEOUS PAY MATTERS

A. WAIVING OF RETIREMENT PAY

Retired personnel who waive all or a portion of their Navy retired pay to receive Veterans Administration compensation may subsequently re-elect to receive Navy retired pay. (This is explained

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