Is the federal retiree COLA taxable?

The rule in one sentence

Publication 721 explains that every monthly payment of a CSRS or FERS annuity is split into two parts: a tax-free part that returns the contributions you already paid tax on, and a taxable part that is everything above it. The publication then adds the sentence that settles the COLA question: the tax-free part is a fixed dollar amount, and it remains the same even if your annuity is increased.

That means a cost-of-living adjustment is never shared between the two parts. Your exclusion was set once, when the annuity started, by dividing your cost by the number of months in the Simplified Method table. It does not grow with later increases, so each dollar of increase is taxable income.

Where the fixed number comes from

For anyone whose annuity starting date is after November 18, 1996, the Simplified Method is mandatory. Worksheet A divides your cost in the plan (line 2) by a number of months taken from a table (line 3) to get the tax-free amount per month (line 4). The table depends on your age at the annuity starting date, or on the combined ages of you and your survivor beneficiary if the annuity includes a survivor benefit and starts after 1997.

The worksheet also tells you what to do in later years. If your annuity started before this year and you completed the worksheet last year, you skip line 3 and enter last year’s line 4 amount, “even if the amount of your pension or annuity has changed.” That instruction is the COLA rule written into the form: the exclusion carries forward unchanged and only the payments on line 1 move.

Worked example from the publication, with a hypothetical increase

The publication’s Bill Smith example has a $1,000 monthly annuity, a $31,000 cost and 310 expected payments (his and his wife’s combined ages were 122), so his tax-free monthly amount is $31,000 ÷ 310 = $100. Before any increase, $900 of each payment is taxable.

Now suppose, purely as an illustration and not as any real rate, that his payment rose by $30 to $1,030 a month. The tax-free amount stays at $100, so the taxable part becomes $930. The whole $30 is added to taxable income, and over a full year that is $360 more on Form 1040 line 5b. The calculator above runs exactly this arithmetic with your own figures.

When the exclusion ends

There is a second reason a COLA looks fully taxable over time. For an annuity starting after 1986, the total you can exclude over the years cannot exceed your total cost. In the Bill Smith example the exclusion runs for 310 payments. After that, the publication says payments are generally fully taxable, and from then on every dollar of the annuity, increases included, is income.

If you die before the full cost is recovered, the unrecovered amount can be claimed as an “Other Itemized Deduction” on your final return. For annuities that started before 1987 the monthly exclusion can continue for as long as you are paid, even beyond your cost.

COLAs on survivor annuities

The same logic runs through the survivor sections. A survivor who uses the Simplified Method takes the same fixed monthly exclusion the retiree used, and the publication states that a cost-of-living increase in survivor annuity payments does not change the amount that can be excluded. Where the General Rule applies, the publication says not to apply the exclusion percentage to any cost-of-living increases made after the annuity starting date, and that those increases are fully taxable.

Paperwork and withholding

OPM mails Form CSA 1099-R each year showing the tax withheld and the taxable amount it figured with the Simplified Method. If its taxable figure is larger than the amount you figure on Worksheet A line 9, the worksheet instructions say to use the amount from the worksheet instead. Your annuity is subject to federal income tax withholding unless you choose otherwise, and a bigger monthly payment raises the tax you owe, so it may be worth checking your withholding election and estimated tax. The publication points to Form W-4P and Pub. 505 for this.

What this page does not cover

This is about the COLA on a CSRS or FERS annuity under the IRS publication. Social Security cost-of-living adjustments follow different rules, and state income tax treatment of federal pensions varies. This page also gives no COLA percentages, because Publication 721 does not state any; OPM publishes the rate that applies to your annuity.

Sources

• IRS Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits (2025): Rules for Retirees (Part II): Recovering your cost tax free; Simplified Method and Worksheet A; Exclusion limit; Deduction of unrecovered cost. Rules for Survivors of Federal Retirees (Part V): CSRS or FERS Survivor Annuity. 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.