How Your FERS Annuity Is Taxed in 2026: The Federal Math, the State-by-State Reality, and the 1099-R Decoder

Last Updated: May 20, 2026

You've spent 25 or 30 years building your FERS pension. Now the IRS wants its cut. Here's how to figure out exactly how much that is, what your OPM 1099-R actually says, and which states will take a second bite.

Key Takeaways

• 96% of a typical FERS annuity is taxable as ordinary income at the federal level; only your prior after-tax contributions are excluded, recovered over time using the IRS Simplified Method
• OPM issues a CSA 1099-R, not a TSP form; since 2002, OPM pre-calculates Box 2a for most retirees, but pre-2002 retirees may see "UNKNOWN" and need to run the Simplified Method themselves
• Default OPM withholding is single/zero allowances; most married retirees and anyone with multiple income streams is under-withheld without a W-4P update
• Colorado is the biggest 2026 state tax change: SB25-136 eliminated state pension tax for anyone age 55 and older, effective January 1, 2026
• Michigan effectively zeroed out pension tax for most retirees in 2026 with deduction amounts of $65,987 (single) / $131,794 (MFJ)
• 17 states (9 no-income-tax + 8 full-exemption states) owe zero state tax on your FERS annuity; use the table below to find your state

The Federal Rule: Most of Your Annuity Is Taxable

Your FERS annuity is taxed as ordinary income at the federal level, at whatever marginal rate applies to your total income that year. The one exception is the small portion that represents a return of your own contributions.

During your federal career, you paid into the FERS Retirement and Disability Fund from your after-tax salary. Pre-2013 hires contributed 0.8% of basic pay. Employees hired in 2013 contributed 3.1%. Those hired after 2013 contributed 4.4%. The government contributed significantly more. When you retire, you recover your personal contributions tax-free, spread across your expected lifetime of payments. Everything else is taxable.

For a typical 30-year career at the 0.8% rate, total employee contributions might run $25,000 to $45,000. Divided across 20-plus years of payments, the annual tax-free exclusion is a few hundred dollars at most. The result: roughly 95-98% of each annuity payment is taxable in a given year.

The Simplified Method: How to Calculate Your Tax-Free Slice

If your annuity starting date is after November 18, 1996 (which covers nearly all current FERS retirees), you must use the IRS Simplified Method. You cannot use the older General Rule. This is not optional.

Here is how it works.

Step 1. Find your total employee contributions. OPM sends you this figure when your annuity is approved. It also appears on your retirement estimate paperwork. OPM calls this your "cost" or "investment in the contract."

Step 2. Look up the expected number of payments from the IRS table based on your age on the annuity starting date.

IRS Table 1: Single-Life Annuities (For annuities starting after 1997 with no survivor benefit)

Age on Annuity Start Date	Expected Monthly Payments
55 and under	360
56 to 60	310
61 to 65	260
66 to 70	240
71 and older	210

Source: IRS Publication 575 (2025), Worksheet A

If your annuity includes a survivor benefit for a spouse, use Table 2, which is based on your combined ages at retirement. Combined ages of 131 to 140, for example, give 260 expected payments.

Step 3. Divide total contributions by expected payments. That result is your monthly tax-free exclusion.

Step 4. Multiply by 12 (or by the number of months you received payments that year) to get your annual tax-free amount.

Step 5. Once your total contributions are recovered, stop. After that point, every payment is 100% taxable. For most retirees, full recovery takes 20-plus years.

A Worked Example

Maria retires at age 62. Her monthly FERS annuity is $4,583 ($55,000 per year). She contributed $48,000 to FERS over her career.

• Age at retirement (62) falls in the 61-65 band: 260 expected payments
• Monthly exclusion: $48,000 / 260 = $184.62 per month
• Annual tax-free amount: $184.62 x 12 = $2,215
• Annual taxable FERS income: $55,000 - $2,215 = $52,785 (95.97% taxable)

Maria's exclusion amount stays fixed even when her annuity receives cost-of-living adjustments. COLAs do not increase the exclusion.

Reading Your OPM CSA 1099-R

OPM sends Form CSA 1099-R to retirees by January 31 each year. Survivors receive Form CSF 1099-R instead. These are also available on OPM Retirement Services Online starting January 31.

One important point before you dig in: since 2002, OPM has been calculating the taxable amount for most retirees. Box 2a on your CSA 1099-R should already show the pre-calculated number. If you retired before 2002, Box 2a may show "UNKNOWN" (see below).

CSA 1099-R Box-by-Box Guide

Box	Label	What It Shows for FERS Retirees
1	Gross Distribution	Total annuity received during the year, before any withholding
2a	Taxable Amount	Gross annuity minus the Simplified Method exclusion; pre-calculated by OPM since 2002. Shows "UNKNOWN" for some pre-2002 retirees
2b	Taxable Amount Not Determined	Checked if Box 2a is blank; means you calculate it yourself
3	Capital Gain	Rarely used for regular FERS annuities
4	Federal Income Tax Withheld	Total federal tax OPM withheld based on your W-4P
5	Employee Contributions or Insurance Premiums	Two items combined: (1) the tax-free exclusion amount recovered that year, and (2) any after-tax FEHB premiums. Do not add this back to income
7	Distribution Code	Code 7 = normal distribution for retirees over 59.5. Code 2 = early distribution with exception. Code 4 = death or survivor benefit (CSF form only)
9b	Total Employee Contributions	Your cumulative after-tax contributions; tracks remaining cost basis for the Simplified Method
14	State Tax Withheld	State income tax withheld from your annuity, if any
15	State/Payer's State No.	State tax ID used for state filing
16	State Distribution	Amount subject to state income tax

Source: OPM Tax Information for Annuitants; IRS Instructions for Form 1099-R (2025)

What To Do If Box 2a Says "UNKNOWN"

Some retirees still see "UNKNOWN" in Box 2a. This happens when the annuity started before OPM centralized its computation (generally pre-2002), or in complex cost-recovery situations.

Your fix: use IRS Publication 721, Worksheet A (the Simplified Method Worksheet) to calculate your exclusion. Enter the taxable result on Line 5b of Form 1040. If you have a tax preparer, give them Publication 721 and your employee contributions figure from Box 9b.

CSA vs. CSF: Which Form You Receive

Your claim number tells you which form applies:

• CSA prefix: you are the retiree
• CSF prefix: you are receiving a survivor annuity; Box 7 shows Code 4

Surviving spouses continue to recover the original retiree's unrecovered cost basis using the same exclusion amount. Once that basis is fully recovered, the survivor annuity is 100% taxable.

Withholding: Why So Many Retirees Get a Surprise Tax Bill

OPM withholds federal income tax from your annuity by default, using single filing status with zero allowances. That default is fine if you are single with no other income. For most retirees, it leaves you short.

Here is the problem: your FERS annuity, TSP withdrawals, and Social Security each withhold only based on their own payment. None of them know about the other two. When you add all three together at tax time, you may be in a higher bracket than any single payer assumed.

Log in to OPM Retirement Services Online and update your W-4P. Options:

• Select married filing jointly
• Add an extra flat dollar amount withheld each month
• Elect zero withholding if you prefer to pay quarterly estimates

You can also mail a completed Form W-4P to OPM or call 1-888-767-6738.

Practical check: Run the IRS Withholding Estimator in October or November using your year-to-date figures from all income sources. If you're short, add extra withholding on your W-4P for the remainder of the year.

Source: OPM Change Your Federal and State Income Tax Withholdings

Effective Federal Tax Rate at Different Annuity Levels

The table below shows estimated federal taxes on the FERS annuity alone, for a single filer taking only the standard deduction. These are annuity-only scenarios. Most retirees will have TSP income and Social Security on top of this, which will push the effective rate higher.

2026 parameters: Standard deduction $16,100 (single). 96% of annuity is taxable (4% Simplified Method exclusion assumed).

Gross Annual Annuity	Taxable Federal Amount	Est. Federal Tax	Effective Rate
$30,000	$28,800	~$1,498	~5.0%
$50,000	$48,000	~$4,478	~8.9%
$75,000	$72,000	~$9,218	~12.3%
$100,000	$96,000	~$15,218	~15.2%

FedTools 2026 analysis. Assumes single filer, standard deduction only, no other income. Actual tax depends on all income sources, filing status, deductions, and credits. For a full pension estimate, use the FERS Retirement Calculator.

The reality for most retirees: A single retiree with a $60,000 annuity, $30,000 in Social Security (85% taxable = $25,500 taxable), and $20,000 in TSP withdrawals has about $95,500 in taxable income after the standard deduction. Effective federal rate lands around 14-16%, not the 8-9% the annuity-only table suggests.

State-by-State: How Your State Taxes Your FERS Annuity

State tax treatment of federal pensions is all over the map. Here is where all 50 states and DC stand in 2026.

States with No Income Tax (9 States)

Zero state income tax means zero state tax on your FERS annuity:

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming

States with Income Tax That Fully Exempt Federal Pensions (8 States)

These states have income taxes but do not tax federal government pensions:

State	Income Tax Rate	Notes
Alabama	Up to 5%	Federal pensions fully exempt
Hawaii	1.4% to 11%	Federal pensions fully exempt
Illinois	4.95% flat	All retirement income exempt
Iowa	3.8% flat	Federal pensions exempt for age 55 and older
Kansas	Up to 5.7%	Federal pensions exempt; Social Security exempt below $75K MAGI
Mississippi	4%	Pensions exempt except certain early distributions
New York	4% to 10.9%	Federal, state, and local government pensions fully exempt
Pennsylvania	3.07% flat	Federal pensions, IRAs, and Social Security all exempt

Sources: Kiplinger pension tax guide (2026); individual state department of revenue pages

States with Partial Exemptions (Worth Checking)

State	2026 Exemption	Age Requirement	What Changed
Colorado	Full (unlimited)	55 and older	NEW for 2026. SB25-136 eliminated all prior caps. Age 55+ can subtract the full pension from state taxable income starting January 1, 2026.
Georgia	Up to $35,000	Ages 62 to 64	$65,000 exemption for age 65 and older
Maryland	Approx. $41,200	65 and older	"Pension exclusion" for qualified employer plan distributions
Michigan	$65,987 deduction (single) / $131,794 (MFJ)	Varies by birth year	2026 phase-in effectively zeroes pension tax for most federal retirees
New Jersey	Up to $100,000 (MFJ)	62 and older	Phases out at higher income levels
Virginia	$12,000 age deduction	65 and older	General age deduction, not pension-specific

Sources: Colorado SB25-136; Georgia Department of Revenue; Maryland Comptroller; Michigan MERS guidance

Colorado note: This is the biggest state-level win for federal retirees in 2026. Before SB25-136, Colorado capped the pension deduction at $24,000 for those 65 and older and $20,000 for ages 55 to 64. Now there is no cap. A $70,000 FERS annuity is fully deductible for a 55-year-old Colorado retiree starting with tax year 2026.

Michigan note: The deduction amounts are high enough that most federal retirees will owe zero Michigan state income tax in 2026. The deduction limits vary slightly by birth year cohort; check the Michigan Department of Treasury or the Michigan MERS guidance for your specific tier.

States That Fully Tax Federal Pensions

If you live in one of these states, your FERS annuity is treated like any other ordinary income:

California (up to 13.3%), Connecticut (3% to 6.99%), Maine (5.8% to 7.15%), Massachusetts (5% flat), Missouri (up to 5.4%), Montana (4.7% to 5.9%), Nebraska (2.46% to 6.64%), North Carolina (3.99% flat), Ohio (0% to 3.75%), Oregon (4.75% to 9.9%), Rhode Island (3.75% to 5.99%), Vermont (3.35% to 8.75%), West Virginia (2.36% to 5.12%), Wisconsin (3.54% to 7.65%).

DC residents: federal pensions are fully taxable at rates up to 10.75%.

Disclaimer: State tax law changes constantly. Verify current rules with your state's department of revenue or a tax professional before making any financial decisions based on state residency.

Want the full picture beyond taxes? The Best States to Retire as a Federal Employee guide covers cost of living, FEHB access, and state-specific quirks side by side.

Special Situations That Change the Tax Treatment

The FERS Supplement (Before Age 62)

If you retired before age 62 and receive the FERS Special Retirement Supplement, that supplement is 100% taxable as ordinary income. There is no return-of-contributions exclusion for the Supplement because it mimics Social Security, which has its own separate rules. Every dollar of Supplement goes directly into your taxable income.

FERS Disability Retirement

The tax treatment shifts before your Minimum Retirement Age (MRA). Disability payments before MRA may qualify for the disability income exclusion. After you reach MRA, the annuity is treated as regular pension income and the Simplified Method applies. IRS Publication 721 has a dedicated section on disability retirements.

Survivor Annuities

When a retiree dies and a surviving spouse begins receiving a survivor annuity, OPM issues a separate CSF 1099-R. The survivor continues recovering the retiree's unrecovered cost basis at the same monthly exclusion amount. Box 7 on the CSF form shows distribution Code 4. Once the full cost is recovered, the survivor annuity is 100% taxable from that point on.

Estimate Your Pension Before You Retire

Before you retire, get a number. Use the FERS Retirement Calculator to estimate your annuity based on your years of service, high-3 salary, and retirement age.

Frequently Asked Questions

Is my FERS annuity taxable?

Yes, most of your FERS annuity is taxable as ordinary income at the federal level. Typically 95-98% of each payment is taxable. The small tax-free slice represents the return of your own after-tax contributions, recovered gradually using the IRS Simplified Method. State taxation varies widely.

What is the IRS Simplified Method for FERS retirees?

The Simplified Method is the required way to calculate the tax-free portion of your FERS annuity. You divide your total after-tax employee contributions by the expected number of payments from an IRS table based on your age at retirement. That dollar amount is excluded from taxable income each month until your cost is fully recovered.

Why does Box 2a on my OPM 1099-R say UNKNOWN?

Box 2a shows UNKNOWN when OPM could not pre-calculate your taxable amount, which typically happens for retirements that began before 2002. You must use the IRS Simplified Method Worksheet (IRS Publication 721, Worksheet A) to determine your taxable amount and report the result on Line 5b of Form 1040.

How do I change the federal tax withheld from my FERS annuity?

Log in to OPM Retirement Services Online and update your W-4P election. You can change your filing status, add extra withholding per month, or elect no withholding. You can also mail a completed Form W-4P to OPM or call 1-888-767-6738. The default withholding is single with zero allowances, which under-withholds for most married retirees.

Which states do not tax federal pensions?

Nine states have no income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Eight additional states have income tax but fully exempt federal government pensions: Alabama, Hawaii, Illinois, Iowa, Kansas, Mississippi, New York, and Pennsylvania. Colorado added a full pension exemption for age 55 and older starting January 1, 2026.

Does the FERS Supplement get taxed the same way as the annuity?

No. The FERS Supplement is 100% taxable as ordinary income. Unlike your regular FERS annuity, there is no return-of-contributions exclusion. Every dollar of the Supplement adds to your taxable income until the month you turn 62.

Related Resources

• FERS Retirement Calculator: Estimate your pension before you retire
• Tax Planning for Federal Retirees 2026: Strategies to reduce your overall retirement tax burden (IRMAA, Roth conversions, the $6,000 senior deduction)
• TSP 1099-R Tax Guide 2026: How your TSP distributions are reported and taxed (different form, different rules)
• FERS Retirement Income Guide 2026: The full picture of pension, TSP, and Social Security stacking together
• Best States to Retire as a Federal Employee 2026: State-by-state comparison including taxes, cost of living, and FEHB access
• FERS Retirement Guide: Full reference for pension eligibility, calculations, and survivor benefits