Publication 721: Tax Guide to Civil Service Retirement

IRS Publication 721, the tax guide for civil service retirement benefits, explains how to split each CSRS or FERS annuity payment into a taxable part and a tax-free return of the contributions you already paid tax on during your career. The core calculation, called the Simplified Method, divides your total after-tax contributions by a fixed number of expected payments from an IRS table. The result is a monthly amount you exclude from income every month until you’ve recovered everything you put in.

The Simplified Method Calculation

If your annuity started after November 18, 1996, you use the Simplified Method.¹ The older General Rule now covers only nonqualified plans and a narrow group of annuitants who were 75 or older at their starting date.

Three steps:

Find your total cost in the plan. This is the sum of all after-tax contributions you made to CSRS or FERS. OPM tracks the figure and it appears on your annuity records.
Look up the expected number of monthly payments in the IRS table that matches your situation (single-life or joint-and-survivor).
Divide your cost by that number. The result is your fixed monthly tax-free amount.

That monthly exclusion doesn’t change over time. Cost-of-living adjustments raise your gross payment but leave the exclusion alone, so more of each payment becomes taxable as the years pass.

Expected Payments for a Single-Life Annuity

Use your age when payments began:²

55 or younger: 360 payments
56 to 60: 310 payments
61 to 65: 260 payments
66 to 70: 210 payments
71 or older: 160 payments

Expected Payments With a Survivor Benefit

Add the ages of both annuitants at the starting date:²

Combined ages 110 or under: 410 payments
111 to 120: 360 payments
121 to 130: 310 payments
131 to 140: 260 payments
141 or older: 210 payments

A Worked Example

You retire at 65 with a survivor annuity for your spouse, who is 57. Combined ages of 122 fall in the 121–130 row, so you use 310 expected payments. You contributed $31,000 over your career. Divide $31,000 by 310 and your tax-free monthly amount is $100.¹

If your gross monthly annuity is $1,000, you exclude $100 and report $900 as taxable each month. Over a full year of 12 payments, that’s $12,000 gross, $1,200 excluded, and $10,800 taxable. The $100 exclusion stays the same every month until you’ve recovered the full $31,000, which takes 310 months at $100 per month.

What Happens After You Recover Your Cost

Once your monthly exclusions add up to your original cost, every payment after that is fully taxable. OPM sometimes signals the switch by marking Box 2a of your 1099-R as “Unknown,” meaning they’ve stopped calculating a tax-free portion for you.³ If that happens after years of a stated taxable amount, you’ve likely finished recovering your contributions.

If you die before recovering the full cost, the unrecovered balance is allowed as an itemized deduction on your final tax return.⁴ The deduction goes on the return for the year of death.

Disability Retirement Is Taxed Differently

Disability retirement payments aren’t treated as pension income at first. Until you reach your minimum retirement age (MRA), you report them as wages on your tax return, and the Simplified Method doesn’t apply.⁵ At MRA the payments automatically shift to pension treatment, and you begin recovering your cost basis through the monthly exclusion.

MRA depends on your birth year. For FERS, the range runs from 55 to 57:⁶

Born before 1948: MRA is 55
Born 1948–1952: MRA is 55 plus 2 to 10 months, in 2-month increments by birth year
Born 1953–1964: MRA is 56
Born 1965–1969: MRA is 56 plus 2 to 10 months
Born 1970 or later: MRA is 57

Retirees who go out on disability in their 40s or early 50s can spend years reporting the payments as wages before the shift. Mark the MRA date so you know when to start the Simplified Method calculation.

Survivor Annuities

A survivor annuity paid after a federal retiree dies is taxable income to the survivor. The survivor also inherits whatever cost the retiree hadn’t yet recovered and continues the monthly exclusion under the Simplified Method until the remaining cost is used up.¹ If the retiree had already recovered the full cost before death, the survivor annuity is fully taxable from the first payment.

When a surviving spouse’s check includes an amount for one or more children, each child’s share counts as that child’s income, not the spouse’s.¹

Lump-Sum Death Benefit

If a federal employee dies before retiring and no one qualifies for a survivor annuity, OPM pays the accumulated contributions plus interest in a lump sum to the designated beneficiary or estate. The contributions come back tax-free; only the accrued interest is taxable.¹ The same rule applies when a retiree dies with no eligible survivor and unpaid contributions remain.

Refunds If You Leave Before Retirement

If you separate from federal service before qualifying for an annuity, you can request a refund of your retirement contributions. The contributions themselves are tax-free, but any interest included in the refund is taxable in the year you receive it.⁷

Two handling options. Take the payment directly and OPM withholds 20% of the taxable interest for federal income tax if that portion exceeds $200.⁷ Or have OPM send the taxable portion directly to an IRA or another employer plan that accepts rollovers, which avoids withholding. If you take the payment and then decide to roll it over, you have 60 days, but you’ll need to replace the 20% already withheld out of pocket to roll the full amount. Anything not rolled over is taxed as income for the year.

Public Safety Officer Insurance Premium Exclusion

Retired public safety officers (law enforcement, firefighters, and certain other categories) can exclude up to $3,000 per year from taxable annuity income if that money pays health or long-term care insurance premiums.⁸ The coverage must be for you, your spouse, or dependents, and the premiums have to come directly from the retirement plan.

To claim it, reduce the taxable amount you report on Form 1040 line 5b by the excluded amount (up to $3,000) and enter “PSO” on line 5c. You can’t also deduct those premiums as a medical expense.

Reporting the Annuity on Your Tax Return

OPM mails Form 1099-R by January 31, and it usually appears in Retirement Services Online in the third week of January.⁹

Box 1 shows your total gross annuity for the year. Box 2a shows the taxable amount. If Box 2a says “Unknown,” OPM didn’t calculate the tax-free portion, and you run the Simplified Method yourself using the worksheet in Publication 721.³ Box 4 shows federal tax withheld. Box 7 carries a distribution code: 7 for a normal retirement, 3 for disability, 4 for a death benefit paid to a survivor.¹⁰

On Form 1040 or 1040-SR, put the gross distribution from Box 1 on line 5a and the taxable amount (after subtracting the monthly exclusion for each month you received payments) on line 5b.¹¹ If you’ve fully recovered your cost, the entire payment goes on line 5b. Disability payments received before MRA go on line 1h as wages instead.

Setting Your Withholding

OPM withholds federal income tax based on the Form W-4P you have on file. If you never submitted one, OPM withholds as though you’re single with no adjustments, which often takes more than needed.¹² Filing a new W-4P lets you set your filing status, claim credits for dependents, adjust for itemized deductions, or request additional withholding.

You can also elect no withholding, but then estimated tax payments have to make up the difference. The IRS expects you to pay at least 90% of the current year’s tax or 100% of last year’s tax through a combination of withholding and estimated payments. If your prior-year AGI exceeded $150,000, the second safe harbor rises to 110% of last year’s tax.¹³ Underpayment penalties kick in once you owe $1,000 or more after withholding and credits.

1
Internal Revenue Service. Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits
2
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
U.S. Office of Personnel Management. Why Has My Taxable Amount Changed to Unknown
4
Internal Revenue Service. Publication 939, General Rule for Pensions and Annuities
5
Internal Revenue Service. Publication 907, Tax Highlights for Persons With Disabilities
6
U.S. Office of Personnel Management. Eligibility
7
U.S. Office of Personnel Management. Former Employees – FERS Information
8
Internal Revenue Service. Publication 575, Pension and Annuity Income
9
U.S. Office of Personnel Management. Tax Information for Annuitants
10
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
11
Internal Revenue Service. 1040 Instructions
12
Internal Revenue Service. Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments
13
Internal Revenue Service. 2026 Form 1040-ES