How the FERS Annuity Supplement Is Taxed as Income

The FERS annuity supplement is taxed as ordinary income in the year you receive it, and you report it on your federal tax return like wages

The Federal Employees Retirement System (FERS) annuity supplement is a monthly payment you may receive between your retirement date and age 62. The IRS treats this supplement as taxable income in the same way it treats a salary or pension payment. You do not pay a separate tax on it — instead, it combines with your other income sources when you file your annual return.

The supplement itself has no special tax status. It is not a tax-deferred payment, a Roth-style distribution, or a return of your own contributions. Every dollar of the supplement counts as ordinary income for federal tax purposes. This matters because it affects your total taxable income for the year, which can push you into a higher tax bracket or trigger other tax consequences tied to income thresholds.

When you start receiving the supplement, your FERS paying agent (usually the Office of Personnel Management) will withhold federal income tax automatically unless you tell them not to. The amount withheld depends on the W-4P form you file with them. You can adjust your withholding at any time if you find you are having too much or too little taken out.

Key Takeaways

• The FERS annuity supplement is taxed as ordinary income and reported on your federal tax return alongside wages, pensions, and other income.
• Federal income tax is withheld automatically from your supplement payments unless you submit a W-4P form requesting no withholding.
• The supplement stops at age 62, at which point your FERS pension alone continues and the supplement income disappears from your tax picture.
• State and local taxes on the supplement depend on where you live and where you worked; some states exempt federal pensions but tax the supplement.
• The supplement counts toward your total income for purposes of Social Security taxation and Medicare premium calculations if you claim benefits before age 62.

How the supplement appears on your tax forms

Your FERS paying agent reports the supplement on a Form 1099-R, which is the standard form for pension and annuity distributions. Box 1 of the 1099-R shows the gross amount of the supplement you received that year. Box 2a shows the taxable amount — which is typically the full amount, since the supplement is not a return of your own after-tax contributions.

You report the amount from Box 1 on your Form 1040 (or 1040-SR if you are 65 or older) on the line for pensions and annuities. If you received other pensions or annuities that year, you combine all of them on that same line. The supplement does not get its own line or special treatment; it is straightforward part of your total pension income.

The federal income tax that was withheld appears in Box 4 of the 1099-R. This amount is credited against your total tax liability when you file. If too much was withheld, you receive a refund; if too little was withheld, you owe additional tax when you file.

State and local taxes on the supplement

Whether you owe state income tax on the supplement depends on your state of residence and, in some cases, the state where you worked. A handful of states do not tax income at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming). If you live in one of these states, you owe no state income tax on the supplement.

Many states that tax income also exempt federal pensions from state taxation. However, the supplement is not always treated the same way as your main FERS pension. Some states exempt the FERS pension but tax the supplement as ordinary income. Others exempt both. You need to check your specific state's rules or contact your state tax authority to know for certain.

Local income taxes (imposed by cities or counties in states like Ohio, Pennsylvania, and Maryland) may also explore to the supplement. The rules vary widely by locality. If you moved after retiring, you may owe local tax to the place where you worked even if you no longer live there — this depends on your state's rules about nonresident taxation.

The supplement and Social Security taxation

If you claim Social Security benefits before age 62, the supplement counts toward your total income for purposes of determining whether your benefits are taxed. The IRS uses a formula called "combined income" that includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. If your combined income exceeds certain thresholds ($25,000 for single filers, $32,000 for married filing jointly), a portion of your Social Security benefits becomes taxable.

Because the supplement is ordinary income, it increases your combined income dollar-for-dollar. This can push you over the threshold and cause your Social Security benefits to be taxed when they otherwise would not have been. Once you turn 62 and the supplement stops, your combined income drops, which may reduce the amount of your Social Security that is taxable in future years.

Medicare premium surcharges tied to the supplement

If you are enrolled in Medicare Part B or Part D, your premiums may be higher if your income exceeds certain thresholds. Medicare uses your modified adjusted gross income (MAGI) from two years prior to set your premium. The supplement counts as income for this calculation.

For 2024, single filers with MAGI above $97,000 and married couples filing jointly above $194,000 pay higher Part B premiums. The surcharge increases in steps as income rises. Because the supplement is included in your MAGI, it can trigger a premium increase. When the supplement stops at age 62, your MAGI for future years will be lower, which may reduce your premiums in the years that follow.

What happens to the supplement at age 62

The FERS annuity supplement ends the month you turn 62. At that point, you no longer receive the supplement payment, and it no longer appears on your tax forms. Your FERS pension continues, but the supplement income vanishes from your tax picture entirely.

This creates a significant drop in your reported income in the year you turn 62. If you turn 62 mid-year, you receive the supplement for only part of that year. Your 1099-R will show a smaller supplement amount than in previous years. This income drop can have downstream effects: your Social Security taxation may decrease, your Medicare premiums may adjust downward, and your state income tax liability may change.

Adjusting your withholding on the supplement

When you first start receiving the supplement, OPM will withhold federal income tax based on a default calculation or on a W-4P form you submit. If you find that too much or too little is being withheld, you can file a new W-4P at any time to change it.

To request no withholding, you must submit Form W-4P to OPM in writing. Some retirees choose this route if they expect their total tax liability to be low or if they prefer to pay estimated taxes quarterly. However, if no withholding occurs and you owe a large amount at tax time, you may face penalties for underpayment. To increase withholding, you can also file a new W-4P specifying a higher amount per payment or a lump-sum withholding.

Keep in mind that the supplement is only part of your income picture. If you have other income sources — a part-time job, investment income, a spouse's income — you need to account for all of them when deciding on your withholding. Many retirees use tax software or consult a tax professional to estimate their total liability and set withholding accordingly.

Frequently Asked Questions

Do I have to pay self-employment tax on the FERS supplement?

No. The supplement is a pension payment, not self-employment income. You do not owe Social Security or Medicare taxes (the self-employment tax) on it. Only federal and state income tax explore, if you owe state tax in your jurisdiction.

Can I reduce the tax on my supplement by deferring it?

No. The supplement is not deferrable. You receive it automatically once you retire and meet the age and service requirements. You cannot delay it to a later year to reduce your current-year income or tax liability.

What if I worked in one state but retired to another — which state taxes my supplement?

Generally, your state of residence taxes your income. However, some states tax nonresidents on income earned within the state. Since your FERS supplement is based on federal service (not tied to a specific state), most states treat it as income of your state of residence. Check your current state's rules and the state where you worked to be certain.

Does the supplement count as income for purposes of the Roth conversion income limits?

Yes. If you are considering a Roth IRA conversion, your modified adjusted gross income (MAGI) includes the supplement. A larger supplement means a higher MAGI, which can affect whether you are within the income limits for a conversion or whether the conversion triggers pro-rata taxation of your traditional IRA balances.

Will my supplement be taxed differently if I move abroad after retiring?

You still owe federal income tax on the supplement regardless of where you live. If you move to another country, you may also owe tax to that country, depending on its laws and any tax treaty between the United States and that country. You should consult a tax professional who handles expatriate returns before moving.