FERS pension income is taxable as ordinary income to the federal government, and in most cases to your state as well

Your Federal Employees Retirement System (FERS) pension is treated like regular wages for tax purposes. The IRS taxes the full amount of your monthly pension payment as ordinary income in the year you receive it. This is different from some other retirement accounts — you do not get a tax-free withdrawal window, and you cannot defer the tax by leaving the money invested.

The amount you owe depends on your total income that year, your filing status, and whether you have other sources of income like Social Security, investment earnings, or part-time work. Most FERS retirees find that their pension alone does not push them into a higher tax bracket, but the combination of pension plus other income sometimes does.

State tax treatment varies. Most states tax FERS pensions as regular income. A smaller group — including Illinois, Mississippi, and Pennsylvania — exempt military or government pensions entirely or up to a certain amount. If you moved to a new state after retiring, you may owe taxes to your former state on the portion of the pension earned while you worked there, depending on that state's rules.

Key Takeaways

  • FERS pensions are fully taxable as ordinary income to the federal government in the year you receive each payment.
  • Your federal tax rate depends on your total income for the year, not just your pension, so other income sources affect what you owe.
  • Most states tax FERS pensions as regular income, but some states exempt government pensions entirely or up to a set dollar amount.
  • If you worked in one state and retired to another, you may owe taxes to your former state on pension amounts earned during employment there.
  • You can request tax withholding from your pension check to avoid a large bill at tax time, or make quarterly estimated payments instead.

How federal tax withholding works on your FERS check

When you start receiving your FERS pension, the Office of Personnel Management (OPM) does not automatically withhold federal income tax. You have to request it. If you do not, you will owe the full tax bill when you file your return — which can be a surprise if you are not expecting it.

You can request withholding by completing Form W-4P (Withholding Certificate for Pension or Annuity Payments) and submitting it to OPM. On this form, you tell OPM how much to withhold from each check — either a flat dollar amount or a percentage of your payment. You can change your withholding at any time if your situation changes, such as if you start working part-time or receive Social Security.

Many FERS retirees choose to have enough withheld so they owe little or nothing at tax time. Others prefer to withhold less and make quarterly estimated tax payments (Form 1040-ES) instead. Either approach works — the goal is to pay tax throughout the year rather than in one lump sum in April.

When your FERS pension affects your Social Security benefits

If you receive both a FERS pension and Social Security, your combined income may trigger taxation of your Social Security benefits. This happens when your "combined income" — defined as adjusted gross income plus nontaxable interest plus half your Social Security benefits — exceeds certain thresholds.

For 2024, if you file as single and your combined income exceeds $25,000, up to 50 percent of your Social Security benefits become taxable. If it exceeds $34,000, up to 85 percent becomes taxable. For married filing jointly, the thresholds are $32,000 and $44,000. These thresholds have not changed since 1984, so more retirees cross them each year as incomes rise.

Your FERS pension counts toward combined income dollar-for-dollar, so a larger pension pushes you closer to or over these thresholds. This is one reason some FERS retirees delay claiming Social Security — it reduces combined income in the early retirement years and may lower the total tax they owe over their lifetime.

State tax obligations for FERS retirees who move

If you worked as a federal employee in one state and then moved to another state after retiring, your tax situation depends on where you worked and where you now live. Most states tax all income earned by residents, including pensions, regardless of where the work happened.

However, some states have specific rules for government pensions. Illinois, for example, exempts all government and military pensions from state income tax. Mississippi exempts military pensions and some government pensions. Pennsylvania exempts all government pensions. If you moved to one of these states after retiring, you may owe no state tax on your FERS pension at all.

Your former state of employment may also claim tax on the portion of your pension that was earned during the years you worked there. This is less common but does happen. If you worked in one state for 20 years and another state for 10 years, your former state might tax only the portion attributable to those 10 years. Check your state's pension tax rules or speak with a tax professional if you have worked in multiple states.

How to calculate your estimated tax liability

To get a rough sense of what you will owe, start with your annual FERS pension amount and add any other income — Social Security, part-time work, investment income, rental income. This is your gross income for the year.

Subtract the standard deduction for your filing status (for 2024, $14,600 for single filers, $29,200 for married filing jointly, and higher amounts if you are 65 or older). The result is your taxable income. Use the IRS tax tables or a tax calculator to find the federal tax on that amount.

This is an estimate only — your actual tax depends on deductions, credits, and other factors. But it gives you a ballpark figure. If the number is large, you may want to increase withholding on your pension check or make quarterly estimated payments. If it is small, you might reduce withholding and keep more of each check.

Tax-advantaged moves for FERS retirees

Once you are receiving your FERS pension, your options for reducing tax are limited compared to someone still working. You cannot contribute to a traditional IRA or 401(k) to lower your taxable income. However, a few strategies may help.

Charitable giving: If you itemize deductions (rather than taking the standard deduction), donations to may have access to charities reduce your taxable income. For those 70½ or older, a may have access to charitable distribution from an IRA allows you to donate up to $100,000 per year directly to charity without counting it as income — though this only helps if you have an IRA, not a FERS pension.

Tax-loss harvesting: If you have investments outside retirement accounts, you can sell losing positions to offset gains elsewhere, reducing net investment income. This works only if you have investment losses to claim.

Timing of other income: If you have control over when you receive other income — such as bonuses, freelance payments, or distributions from a business — you might spread them across multiple years to stay in a lower tax bracket. This is rarely possible with a pension, but worth considering if you have other income sources.

What records to keep for tax filing

OPM sends you a Form 1099-R each January for the prior year's pension payments. This form shows your total pension received and any federal tax withheld. You will need this form to file your tax return.

Keep copies of any Form W-4P you submitted to OPM, along with confirmation that it was received. If you made changes to your withholding, keep records of those too. If you made quarterly estimated tax payments, keep copies of the Forms 1040-ES you filed and payment confirmations.

If you live in a state that taxes pensions, you may also receive a state tax form (often called a 1099-R equivalent). Keep that as well. Having these documents organized makes tax filing faster and gives you proof of payments if the IRS or your state ever questions your return.

Frequently Asked Questions

Can I avoid paying taxes on my FERS pension?

No. FERS pensions are fully taxable income to the federal government and to most states. You cannot defer the tax or exclude any portion of the payment. Your only choice is how much to withhold from each check or whether to make quarterly estimated payments instead.

What if I did not request withholding and now owe a large tax bill?

You can request withholding retroactively by submitting Form W-4P to OPM now. Going forward, enough will be withheld to cover your tax. For the year you already owe, you can pay the bill in full, set up a payment plan with the IRS, or claim a hardship if you cannot pay. The IRS also allows installment agreements for amounts over $10,000.

Does the Thrift Savings Plan (TSP) affect my FERS pension taxes?

Withdrawals from your TSP are taxed separately from your FERS pension. If you take a lump sum from your TSP, that amount is taxable in the year you withdraw it. If you roll your TSP into an IRA, withdrawals from the IRA are taxed when you take them. Your FERS pension taxes do not change based on TSP activity.

Will my FERS pension be taxed differently if I move to another country?

Yes. If you move abroad, you are still a U.S. citizen and owe federal tax on your FERS pension. However, you may be able to exclude some foreign earned income under the Foreign Earned Income Exclusion — though pensions do not may have access to. You will also owe tax to the country where you live. Consult a tax professional who handles expatriate returns before moving.

Is there a way to reduce my FERS pension taxes through my filing status?

Your filing status affects your tax rate and standard deduction, but not the taxability of your pension itself. If you are married, filing jointly usually results in lower tax than filing separately. If you are single and your income is high, you cannot change your status to reduce tax. Focus instead on withholding and estimated payments to manage your liability throughout the year.