Updated November 5, 2026. Quick answer: Worksheet D in Publication 721 (2025) finds the taxable part of the lump sum paid to an estate or other beneficiary when a CSRS or FERS survivor annuity ends before the employee’s contributions have been paid out. Add the lump sum to the annuity the survivor received tax free, subtract the employee’s total cost, and tax only what is left, if anything.
When Worksheet D applies
The publication describes the case: “If an annuity is paid to the federal employee’s survivor and the survivor annuity ends before an amount equal to the deceased employee’s contributions plus any interest has been paid out, the rest of the contributions plus any interest will be paid in a lump sum to the employee’s estate or other beneficiary.” It usually produces nothing taxable: “Generally, this beneficiary will not have to include any of the lump sum in gross income because, when it is added to the amount of the annuity previously received that was excludable, it will still be less than the employee’s total contributions.” The instruction is “To figure the taxable amount, if any, use Worksheet D.” The case where a retiree’s own annuity ends is on Worksheet E.
Lines 1 to 5
| Line | What it asks |
|---|---|
| 1 | “Enter the lump-sum payment” |
| 2 | “Enter the amount of annuity previously received tax free” |
| 3 | “Add lines 1 and 2” |
| 4 | “Enter the employee’s total cost” |
| 5 | “Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero.” |
The paragraph under the worksheet covers the taxable amount, if there is one: “The taxable amount, if any, generally can’t be rolled over into an IRA or other plan and is subject to federal income tax withholding at a 10% rate.” The one exception to the rollover bar is a nonspousal beneficiary making the transfer the publication describes under its Rollover Rules. It also adds that “the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936.”
The IRS example
The publication’s example: “At the time of your brother’s death in December 2024, he was employed by the federal government and had contributed $45,000 to the CSRS.” “His surviving spouse received $6,600 in survivor annuity payments before she died in 2025.” “She had used the Simplified Method for reporting her annuity and properly excluded $1,000 from gross income.” The balance, “the balance of $38,400 was paid to you in a lump sum as your brother’s sole beneficiary”. Recomputed:
| Line | Entry | Amount |
|---|---|---|
| 1 | Lump-sum payment to the sole beneficiary | $38,400 |
| 2 | Annuity previously received tax free by the survivor | $1,000 |
| 3 | Lines 1 and 2 added (computed) | $39,400 |
| 4 | Employee’s total cost | $45,000 |
| 5 | Line 3 minus line 4, not less than zero (computed) | 0 |
Line 3 is $39,400, which is less than the $45,000 cost, so line 5 is zero and none of the lump sum is taxable.
Unrecovered cost
The publication adds one more rule about the person who received the annuity: any cost that was not recovered tax free is allowed as an Other Itemized Deduction on that annuitant’s final return. That deduction belongs to the annuitant’s return, not to the beneficiary who receives the lump sum.
Example with invented numbers
Illustration, not an IRS example. This shows a case where the sum of the lump sum and the tax-free annuity passes the cost. The lump sum includes interest, which is how the total can pass the cost. Every result is computed from invented inputs.
| Line | Entry | Amount |
|---|---|---|
| 1 | Lump-sum payment (invented) | $22,000 |
| 2 | Annuity previously received tax free (invented) | $25,000 |
| 3 | Lines 1 and 2 added (computed) | $47,000 |
| 4 | Employee’s total cost (invented) | $45,000 |
| 5 | Line 3 minus line 4, not less than zero (computed) | $2,000 |
Line 3 is $47,000, which is $2,000 more than the $45,000 cost, so $2,000 is the taxable amount.
Edition
This page reads Publication 721 (2025), Tax Guide to U.S. Civil Service Retirement Benefits, the file irs.gov served on 2026-11-05). Line numbers and letters belong to that edition, so check the label printed on the worksheet in your own copy before you follow a line reference.
Common mistakes
- Leaving the survivor’s tax-free annuity off line 2. It is added to the lump sum before the cost is subtracted.
- Entering a negative number on line 5. The sheet says not less than zero.
- Using Worksheet D when a retiree’s own annuity ended with no survivor annuity. That case is Worksheet E.
- Assuming a taxable amount can be rolled over. The publication says it generally cannot, with a nonspousal beneficiary exception.
Related: Publication 721, FERS survivor benefit election, and TSP beneficiary rules.
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Answer againSources
- Publication 721 (2025), Tax Guide to U.S. Civil Service Retirement Benefits: https://www.irs.gov/pub/irs-pdf/p721.pdf
- IRS, About Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits: https://www.irs.gov/forms-pubs/about-publication-721
Read from the IRS documents linked above on November 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.