Publication 721 Tax Guide for Civil Service Retirement

IRS Publication 721 is the tax guide for figuring the taxable and tax-free parts of a Civil Service Retirement System or Federal Employees Retirement System annuity. A portion of each monthly payment is a tax-free return of the after-tax contributions you made during your career, and Publication 721 walks you through the Simplified Method used to split every payment into those two pieces. The tax-free amount is a fixed dollar figure per month, set when your annuity starts, and it continues until you have recovered everything you put into the plan.

How to Calculate the Tax-Free Portion

Nearly every federal retiree whose annuity started after November 18, 1996, uses the Simplified Method.¹ The older General Rule now applies only to nonqualified plans and a narrow group of annuitants who were age 75 or older at their starting date. If you retired in the last few decades under CSRS or FERS, the Simplified Method is what you’ll use.

The calculation has three steps.

First, find your total cost in the plan. That’s the sum of all after-tax contributions you made over your career. OPM tracks the figure and it appears on your annuity records.

Second, look up the number of expected monthly payments in the IRS table that matches your situation. One table applies if your annuity covers only your own life. A different table applies if your annuity includes a survivor benefit for a spouse or other beneficiary.

Third, divide your cost by that number of payments. The result is your fixed monthly tax-free amount. Subtract it from your gross monthly payment and the remainder is taxable.

That monthly exclusion stays the same for the life of the annuity. It does not increase when your gross payment goes up through a cost-of-living adjustment, and it does not reset from year to year.

Expected-Payments Tables

For a single-life annuity with no survivor benefit, use your age on the date payments began:²

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

For an annuity that includes a survivor benefit, add both annuitants’ ages at the starting date and use the combined figure:²

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

A Worked Example

Suppose you retired at 65 with a survivor annuity for your spouse, who is 57. The combined ages are 122, which falls in the 121–130 row, so you use 310 expected payments. If your total after-tax contributions were $31,000, dividing by 310 gives a tax-free monthly amount of $100.¹

If your gross monthly annuity is $1,000, you subtract the $100 exclusion and report $900 as taxable income each month. Across 12 payments, that’s $12,000 gross, $1,200 excluded, and $10,800 taxable. The $100 exclusion continues every month until you have recovered the full $31,000, which takes 310 months at $100 per month.

When Your Cost Is Fully Recovered

Once your monthly exclusions add up to your original cost, every payment after that is fully taxable. OPM sometimes signals the change by marking Box 2a on your 1099-R as “Unknown,” meaning they are no longer calculating a tax-free portion for you.³ If that marking appears after years of a specific taxable figure, it generally means you have recovered your contributions.

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

Special Situations

Disability Retirement Before Minimum Retirement Age

If you retired on disability, your payments are taxed as wages rather than as pension income until you reach your minimum retirement age. During that period you report the payments on the wages line of your return and you cannot use the Simplified Method to exclude any portion.⁵ Once you reach your MRA, the payments shift to pension treatment and you begin recovering your cost basis through the monthly exclusion.

For FERS, the MRA depends on your birth year and ranges from 55 to 57:⁶

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

A disability retiree in their 40s or early 50s can spend years reporting payments as wages before the switch to pension treatment. Noting your MRA on the calendar tells you when to start the Simplified Method.

Survivor Annuities

When a federal retiree dies and a spouse or other beneficiary receives a survivor annuity, that annuity is taxable income to the survivor. The survivor also inherits any cost basis the retiree had not 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 start.

If a surviving spouse’s check includes payments for one or more children, each child’s portion is that child’s income, not the spouse’s.¹

Where a federal employee dies before retiring and no one is eligible for a survivor annuity, OPM pays the accumulated contributions plus interest in a lump sum to the designated beneficiary or estate. The original contributions come back tax-free; only the accrued interest is taxable.¹

Public Safety Officer Insurance Premium Exclusion

Retired public safety officers, including law enforcement officers and firefighters, can exclude up to $3,000 per year from their taxable annuity if that money is used to pay health or long-term care insurance premiums.⁷ The coverage must be for you, your spouse, or dependents, and the premiums must be paid directly from the retirement plan.

To claim the exclusion, reduce the taxable amount reported on line 5b of Form 1040 by the excluded amount, up to $3,000, and enter “PSO” on line 5c. The same premiums cannot also be deducted as a medical expense.

Voluntary Contributions

Some CSRS employees made voluntary contributions on top of the required payroll deductions. These are treated as a separate pot for tax purposes even though OPM sends one combined check, and the 1099-R breaks out how much came from regular versus voluntary contributions.¹ If you elected an additional annuity from your voluntary contributions, you figure its tax-free part separately under the same Simplified Method rules.

Reporting Your Annuity on Form 1040

OPM mails Form 1099-R by January 31 and generally makes it available through Retirement Services Online in the third week of January.⁸

Box 1 shows your gross annuity payments for the year. Box 2a shows the taxable amount. If Box 2a says “Unknown,” OPM did not calculate the tax-free portion and you need to run the Simplified Method yourself using the worksheet in Publication 721.³ Box 4 shows federal income tax withheld. Box 7 holds a distribution code: 7 for a normal retirement, 3 for disability, 4 for a death benefit paid to a survivor.⁹

On Form 1040 or 1040-SR, enter the gross distribution from Box 1 on line 5a. Enter the taxable amount, after subtracting your monthly exclusion for every month you received a payment, on line 5b.¹⁰ If your annuity is fully taxable because you have recovered your entire cost, the full amount goes on line 5b. Disability payments received before your MRA go on line 1h as wages instead.

Withholding and Estimated Tax

OPM withholds federal income tax based on the Form W-4P you have on file. If you have never submitted one, OPM withholds as if you are single with no adjustments, which often takes out more than needed.¹¹ An updated W-4P lets you set the correct filing status, claim credits for dependents, account for itemized deductions, or add extra withholding.

You can also elect no federal withholding, but then you need to watch estimated tax. The IRS expects you to pay at least 90% of your current-year tax or 100% of last year’s tax through withholding and estimated payments to avoid an underpayment penalty. If your prior-year adjusted gross income was over $150,000, the safe harbor rises to 110% of last year’s tax.¹² A penalty applies only if you owe at least $1,000 after subtracting withholding and credits.

Publication 721 governs the federal annuity itself. TSP distributions follow a separate set of tax rules, and state treatment of CSRS and FERS annuities varies widely, so neither question is answered by the Simplified Method calculation on your 1099-R.

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
Internal Revenue Service. Publication 575, Pension and Annuity Income
8
U.S. Office of Personnel Management. Tax Information for Annuitants
9
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
10
Internal Revenue Service. 1040 Instructions
11
Internal Revenue Service. Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments
12
Internal Revenue Service. 2026 Form 1040-ES