How FERS Annuity Payments Are Taxed

FERS annuity payments are taxable income

Your Federal Employees Retirement System (FERS) annuity is treated as ordinary income by the IRS. Every payment you receive from FERS is subject to federal income tax, and most states tax it as well. The amount you owe depends on your total income that year, your filing status, and whether you have other sources of retirement income.

The tax is not withheld automatically — you choose how much to have taken from each payment. If you do not request withholding, you may owe taxes when you file your return. Some retirees find it simpler to have taxes withheld; others prefer to manage the money themselves and pay quarterly estimated taxes.

The portion of your annuity that comes from your own contributions — money you deducted from your paychecks while working — receives different tax treatment than the employer portion. This distinction matters for calculating your actual tax bill.

Key Takeaways

• FERS annuity payments count as taxable income at the federal level and in most states, with the tax rate depending on your total income and filing status.
• You control whether taxes are withheld from each payment by completing Form W-4P with your FERS administrator, or you can pay estimated taxes quarterly instead.
• The portion of your annuity funded by your own pre-tax contributions is taxed differently than the employer-funded portion, which affects your total tax.
• If you work after starting your FERS annuity, your annuity income plus your wages may push you into a higher tax bracket.

How the taxable and nontaxable portions are calculated

When you worked for the federal government, you contributed a percentage of your salary to FERS. Those contributions came from your paycheck before taxes were withheld. The federal government also contributed to your account. When you retire, the IRS separates these two parts to determine how much of each payment is taxable.

The nontaxable portion is calculated using a formula based on your total contributions and your life expectancy at the time you start receiving payments. The IRS publishes life expectancy tables by age and gender. Once you know your nontaxable portion, it stays the same for the rest of your life — it does not change if you live longer than expected.

The taxable portion is everything else. If your annuity is $2,000 per month and the IRS determines that $600 is nontaxable, then $1,400 is taxable income each month. You pay income tax on that $1,400, not on the full $2,000.

Your FERS administrator will send you a Form 1099-R each January showing how much you received the previous year and how much was taxable. This form is the official record for your tax return.

Federal income tax withholding from your annuity

When you start receiving your FERS annuity, you must decide whether to have federal income tax withheld. You do this by completing Form W-4P (Withholding Certificate for Pension or Annuity Payments) and submitting it to your FERS administrator. If you do not submit a form, no federal tax is withheld by default.

On Form W-4P, you tell the FERS administrator how many withholding allowances you claim. More allowances mean less tax withheld; fewer allowances mean more tax withheld. The form works similarly to the W-4 you completed when you were employed, but the calculation is different because annuity payments are not subject to Social Security and Medicare taxes.

You can change your withholding at any time by submitting a new Form W-4P. Many retirees adjust their withholding after their first tax year, once they see whether they owed money or received a refund.

If you do not have taxes withheld and your tax bill will be $1,000 or more, the IRS may require you to pay estimated taxes quarterly using Form 1040-ES. This prevents a large bill when you file your return.

State income tax on FERS annuities

Most states tax FERS annuity income as regular income. However, some states offer partial or full exemptions for military pensions, federal employee pensions, or all retirement income. The rules vary widely by state and sometimes by the year you retired.

A few states — including Illinois, Mississippi, and Pennsylvania — do not tax pension income at all, regardless of the source. Other states tax pensions but exempt Social Security. Still others tax all retirement income the same way they tax wages.

Your state tax withholding is separate from federal withholding. You can request state tax withholding on Form W-4P as well, or you can handle it separately. If you move to a different state after you retire, your state tax situation may change, and you may need to file returns in multiple states for the year you moved.

Tax implications if you work after starting your annuity

If you return to federal employment or take another job while receiving your FERS annuity, your annuity income and your wages are combined for tax purposes. This can push you into a higher tax bracket and increase your overall tax bill.

If you return to work for the federal government as a retiree, you may also be subject to the Government Pension Offset (GPO) or Windfall Elimination Provision (WEP) if you later claim Social Security. These rules reduce your Social Security benefit based on your federal pension. They do not affect your FERS annuity directly, but they are worth understanding before you decide to work again.

Some retirees use tax software or work with a tax professional to model different income scenarios before deciding whether to take a job. This can help you understand the full tax impact.

Medicare premiums and the income-related monthly adjustment amount

If you are enrolled in Medicare Parts B and D, your FERS annuity income affects your premiums. The IRS uses a calculation called the Income-Related Monthly Adjustment Amount (IRMAA) to determine whether you pay higher premiums based on your income.

IRMAA is based on your Modified Adjusted Gross Income (MAGI) from two years prior. If your FERS annuity plus other income exceeds certain thresholds, your Medicare Part B and Part D premiums increase. The thresholds change each year and depend on your filing status.

For example, if you are single and your MAGI exceeds $97,000 in 2023, you pay a higher Part B premium in 2025. The premium increases in brackets, so the higher your income, the more you pay. This is separate from your income tax bill but is another way your annuity income affects your overall costs.

Frequently Asked Questions

Can I reduce my FERS annuity taxes by spreading payments over time?

No. Once you start receiving your annuity, you receive it as a monthly payment for life (or as a lump sum if you chose that option). You cannot defer payments or split them across years to lower your tax bracket. Your tax obligation is based on the year you receive the money.

What happens to my FERS annuity taxes if I move to another country?

You still owe U.S. federal income tax on your FERS annuity, even if you live abroad. You must file a U.S. tax return and report the income. You may also owe taxes to the country where you live. Some countries have tax treaties with the U.S. that prevent double taxation, but you need to understand the rules for your specific situation.

Is the survivor annuity portion of FERS taxable?

Yes. If you chose a survivor annuity option when you retired, your monthly payment is reduced to account for the survivor benefit. The full reduced amount is still taxable income to you. When your survivor receives payments after your death, those payments are also taxable to them.

Do I owe taxes on my FERS annuity if my income is below the standard deduction?

Technically, you do not have to file a federal return if your income is below the standard deduction for your filing status. However, if you had taxes withheld from your annuity, you should file to claim a refund. Additionally, state tax rules may differ from federal rules, so check your state's requirements.

How do I know what my nontaxable portion is?

Your FERS administrator calculates this and reports it on your Form 1099-R each year. The form shows the total distribution and the taxable amount. You can also contact your FERS administrator directly to ask for the calculation, or you can work with a tax professional to verify it.