Is a CSRS or FERS pension taxable?

Why only part of it is taxable

Throughout your career, retirement contributions were taken from your pay after you had already paid income tax on that pay. Publication 721 says that amount is included in your gross income in the years it was taken out of your pay, even though you never received it. When the annuity starts, you get that cost back tax free, spread over the payments, and the rest of each payment is taxable. The cost is shown on the annuity statement OPM sends when your annuity is approved, along with the annuity starting date and gross monthly rate.

Which method applies to you

The method depends on your annuity starting date. Before July 2, 1986, the 3-Year Rule or the General Rule applied. For dates after July 1, 1986 and before November 19, 1996, you could choose the General Rule or the Simplified Method. After November 18, 1996, you must use the Simplified Method, and you cannot use the General Rule. OPM has already figured the taxable amount shown on your Form CSA 1099-R using the Simplified Method, but if the form shows a larger amount than you figure on Worksheet A line 9, the worksheet instructions say to use the amount from the worksheet instead.

How the Simplified Method works

Worksheet A has a few steps. Line 1 is the total annuity received this year. Line 2 is your cost. Line 3 is a number of months from Table 1 (an annuity without a survivor benefit) or Table 2 (an annuity with a survivor benefit, for annuities starting after 1997, based on combined ages). Line 4 divides line 2 by line 3 to give the tax-free amount per month. Line 5 multiplies that by the months of payments this year, line 8 caps it at the cost not yet recovered, and line 9 subtracts it from line 1 to give the taxable amount for Form 1040 line 5b.

For an annuity starting after November 18, 1996, Table 1 gives 360 months at age 55 or under, 310 at ages 56 to 60, 260 at ages 61 to 65, 210 at ages 66 to 70 and 160 at age 71 or over. Table 2 gives 410 for combined ages of 110 or under, 360 for 111 to 120, 310 for 121 to 130, 260 for 131 to 140 and 210 for 141 or over.

Worked example from the publication

Bill Smith retired with an annuity starting April 1, 2025, paid in arrears, so his first payment came May 1 and he received 8 payments totaling $8,000. His cost was $31,000, he chose a survivor benefit for his wife, and his combined age with Kathy was 122, so line 3 is 310 from Table 2. Line 4 is $31,000 ÷ 310 = $100. Line 5 is $100 × 8 = $800, so line 9 is $8,000 − $800 = $7,200 taxable. Line 10 shows $800 recovered so far, and line 11 shows $30,200 of cost left. The next year he skips line 3 and reuses the $100.

Had he received twelve $1,000 payments in a later year, the same arithmetic would exclude $1,200 and tax $10,800. If he collects more than 310 payments, the payments after that are generally fully taxable.

The exclusion limit and the final-return deduction

For an annuity starting after 1986, you (or your survivor) can exclude in total no more than your cost. For annuities starting before 1987 the monthly exclusion can continue for as long as you are paid, even past your cost. If you or your survivor die before the whole cost is recovered, and the annuity started after July 1, 1986, the unrecovered cost can be claimed as an “Other Itemized Deduction” on the final return.

Other items that affect the answer

Reduced annuity after a lump sum under the alternative annuity option uses a net cost, reduced by the tax-free part of the lump sum. A public safety officer can reduce the taxable annuity by up to $3,000 of eligible insurance premiums. An annuity under phased retirement has its own guidance. A disability annuity is taxed as wages until minimum retirement age. Part of your annuity can also be community income if it is based on service performed while married and domiciled in a community property state, which matters when you file separately.

Sources

• IRS Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits (2025): Rules for Retirees (Part II): Annuity statement; Your cost; Recovering your cost tax free; Exclusion limit; Simplified Method (Worksheet A, Tables 1 and 2; Bill Smith example); General Rule; 3-Year Rule; Community property laws. Read November 2, 2026.

Edition read: Publication 721 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.