TAXES

Tax planning is a crucial aspect of financial wellness for federal employees, especially as they transition into retirement. With a range of unique benefits and income sources, knowing how each is taxed can help you keep more of what you’ve earned.

Key Federal Benefits and Their Tax Implications

Federal employees receive several core benefits that are treated differently by the IRS:

• FERS Annuity – Most of your FERS annuity is taxable. This includes the portion that represents your agency’s contributions and the earnings on both your and the agency’s contributions. However, a small part of your annuity is not taxed and is considered a return of your after-tax contributions which you made while you were working. The IRS uses the Simplified Method to determine how much of your monthly annuity payment is non-taxable, and this non-taxable portion is spread out over your expected lifetime.
• CSRS Annuity – The CSRS annuity is also partially taxable, with the non-taxable portion based on your after-tax contributions to the retirement system. Because the CSRS annuity requires a higher employee contributions than FERS, it typically has a slightly larger non-taxable portion.
• TSP Withdrawals – Withdrawals from Traditional vs. Roth TSP vary in their tax treatment. Typically, distributions from Traditional TSP are fully taxable, and distributions from Roth TSP are tax-free. However, this can vary by state and situation.
• Survivor Benefits – Although survivor benefits are generally taxed similarly to regular annuity payments, factors like the “widow’s tax” and changes in tax filing status—such as moving from joint to single—can significantly affect a survivor’s overall tax situation.

Broader Tax Planning Topics

In addition to federal-specific benefits, there are other essential tax considerations:

• Social Security – Understand how much of your Social Security benefits may be taxable based on your income.
• State Taxes – Where you live matters. Discover how different states impact your net income and which states have the highest and lowest property tax burdens.

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