Much of a federal government worker’s CSRS or FERS pension benefit will be taxable on a federal income tax return. State income tax laws with respect to pension income vary. You will receive your already-taxed contributions back without having to pay any more tax on them. However, you will receive this money back gradually over your life expectancy. The bulk of the pension you will receive consists of contributions made by your employer (i.e., a federal government agency) and earnings on both your employer’s contributions and your contributions.
Each year, the Office of Personnel Management (OPM) will send you a form 1099-R which lists your total annuity, the taxable portion of your annuity, and your total contributions to the retirement fund. If you die before receiving your contributions back, your survivor (if you have elected a survivor annuity) will continue to receive your contributions back tax-free. If you have no survivor, or if your survivor also dies before recouping your contributions, the remaining contributions may be taken as a miscellaneous itemized deduction on the tax return that your executor files for the year of your death. The deduction is not subject to the usual 2% floor that is applied to miscellaneous itemized deductions. If you live past your projected life expectancy, you will have received all your contributions back. At that point, your entire annuity will be taxable.
For further information about the specifics of federal retirement plans, see http://federalretirement.net/annuity.htm.
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