How is my public pension taxed by the IRS?

Rules checked October 18, 2026, against irs.gov and opm.gov

Taxable part vs your contributions

Each pension payment has two possible parts:

• A taxable part: everything your employer paid in, all investment earnings, and any of your own contributions that were never taxed.
• A tax-free part: a return of your own contributions that were made with after-tax money. The IRS calls this your "cost" or "investment in the contract."

Whether you have any cost depends on how your plan collected your contributions. Many state and local plans use an IRS "pick-up" arrangement. When the employer picks up employee contributions under Internal Revenue Code section 414(h)(2), they are treated as employer contributions and are excluded from your income when made (IRS: Employer pick-up contributions). Pre-tax money has no cost, so the full payment is taxable later. If some of your contributions went in after tax, that part comes back tax-free.

FERS is different. Federal employees' FERS contributions come out of pay after tax, so every FERS retiree has a cost to recover. IRS Publication 721 (the tax guide for federal civil service retirement) explains that part of each annuity payment is a tax-free return of your contributions and the rest is taxable. OPM figures the taxable amount for you and reports it on Form CSA 1099-R.

Your plan's year-end Form 1099-R shows the gross amount (box 1) and, when the plan knows it, the taxable amount (box 2a). For state and local plans, IRS Publication 575: Pension and Annuity Income is the main guide.

The Simplified Method, step by step

If your pension started after November 18, 1996, and comes from a qualified plan (which includes public pension plans), you generally must use the Simplified Method to split each payment into taxable and tax-free parts.

1. Find your cost: your after-tax contributions, which your plan can tell you.
2. Find your number of expected payments from the IRS table below.
3. Divide your cost by that number. The result is the tax-free part of each monthly payment.
4. The tax-free dollar amount stays the same even when cost-of-living raises increase your payment.
5. Once you have recovered your full cost, every later payment is fully taxable.

If your pension includes a survivor benefit, you use the combined ages of you and your survivor instead:

Source: IRS Publication 721 (PDF), Simplified Method Worksheet tables; the same tables are in Publication 575.

Withholding: W-4P, W-4R and Services Online

Pension payments are treated like wages for withholding. The rules in Publication 575 and Publication 505 are:

• Monthly payments: use Form W-4P to tell your plan how much to withhold. If you don't file one, the plan withholds as if you were single with no adjustments. That default can be too little for a married couple with two pensions, or too much for someone with a small pension and no other income.
• One-time payments: payments that can't be rolled over have a default 10% withheld; use Form W-4R to change it.
• Rollover-eligible lump sums: 20% must be withheld if paid to you. A direct rollover avoids it. See lump sum or monthly.
• You can usually choose no withholding on regular pension payments. You would then need to pay estimated tax if you owe enough.

Federal retirees change withholding through OPM's Services Online (servicesonline.opm.gov) or by calling OPM's Retirement Information Office at 1-888-767-6738, as described in Publication 721. Oregon PERS and Washington DRS retirees file a W-4P with their system.

Social Security can have tax withheld too. You can choose to withhold 7%, 10%, 12% or 22% of each monthly payment (SSA: Request to withhold taxes), using IRS Form W-4V.

Estimated tax payments

If withholding doesn't cover your tax, you may need to send quarterly estimated payments with Form 1040-ES. For 2026, Publication 505 says you generally must pay estimated tax if you expect to owe at least $1,000 after withholding and credits, and your withholding and credits will be less than the smaller of:

• 90% of your 2026 tax, or
• 100% of your 2025 tax (110% if your 2025 adjusted gross income was more than $150,000, or $75,000 if married filing separately).

Many retirees find it simpler to raise pension withholding instead.

The $3,000 public safety officer exclusion

Retired public safety officers can leave up to $3,000 a year out of taxable income if pension money pays for health insurance or long-term care insurance. According to Publication 575:

• Who: law enforcement officers, firefighters, chaplains, and members of a rescue squad or ambulance crew who retired because of disability or at normal retirement age.
• What: premiums for you, your spouse or your dependents. You exclude the smaller of the premiums or $3,000.
• Which plan: the money must come from the plan of the employer you retired from.
• The 2022 change: the rule used to require the plan to pay the insurer directly. The SECURE 2.0 Act removed that requirement, so payments made after December 29, 2022 qualify whether the plan pays the insurer or pays you and you pay the premium.

Your 1099-R will not show this exclusion. You reduce the taxable amount yourself on your return and mark it "PSO" on the pensions line (line 5c of Form 1040).

Deductions that help retirees

• Standard deduction (2026): $16,100 single, $32,200 married filing jointly (Publication 505), plus an extra amount for people 65 or older.
• Enhanced deduction for seniors (2025 to 2028): an additional $6,000 for each person 65 or older ($12,000 for a couple when both qualify), reduced when modified adjusted gross income is above $75,000 ($150,000 joint) (IRS: Enhanced deduction for seniors).
• Social Security: part of your benefit may be taxable depending on your other income, including your pension. The IRS explains the formula in its Social Security tax guidance.

State tax

State tax is separate and depends on where you live, not where you worked. Oregon taxes public pensions but not Social Security, while Washington and Nevada have no individual income tax today. See state tax on public pensions for Oregon, Washington, Idaho, Arizona, Nevada and California.

What to do next

1. Find your cost. Ask your plan how much of your contributions were after-tax. FERS retirees can rely on OPM's CSA 1099-R.
2. Set withholding early. File a W-4P with your retirement application, and a W-4V with Social Security if you want tax withheld there.
3. Check after the first payment. Compare the first few months' withholding with the tax you expect for the year.
4. Plan the whole budget. See our retirement budget guide for net income after tax and premiums.

General information, not advice. We aren't part of the IRS, OPM or any retirement system. For your own tax figures, ask your retirement system for your cost and taxable amount, and a tax professional or the IRS about your return.