Updated November 5, 2026. Quick answer: Worksheet B in Publication 721 (2025) splits the lump-sum payment under the CSRS or FERS alternative annuity option into a tax-free part and a taxable part. Your cost is multiplied by the ratio of that cost to the present value of the annuity contract, and the taxable remainder also becomes your net cost for Worksheet A.
When Worksheet B applies
The alternative annuity option is a choice at retirement. The publication says “If you make this choice, you will receive a lump-sum payment equal to your contributions to the plan and a reduced monthly annuity.” You qualify only if “You are retiring, but not on disability.” “You have a life-threatening illness or other critical medical condition.” and “You don’t have a former spouse entitled to court-ordered benefits based on your service.” The sheet itself is described this way: “Use Worksheet B (near the end of this publication) to figure the taxable part of your lump-sum payment.” The reduced annuity is then figured on Worksheet A.
Lines 1 to 5
| Line | What it asks |
|---|---|
| 1 | “Enter your lump-sum credit (your cost in the plan at the annuity starting date)” |
| 2 | “Enter the present value of your annuity contract” |
| 3 | “Divide line 1 by line 2” |
| 4 | “Tax-free amount. Multiply line 1 by line 3.” “(Caution: Don’t include this amount on line 6 of Worksheet A in this publication.)” |
| 5 | “Taxable amount (net cost in the plan). Subtract line 4 from line 1.” “Include this amount in the total on Form 1040, 1040-SR, or 1040-NR, line 5b.” “Also, enter this amount on line 2 of Worksheet A in this publication” |
The printed worksheet gives no rounding instruction for line 3, so the illustration below uses inputs that divide exactly.
Where the two inputs come from
Line 1 is the lump-sum credit. The publication says “Generally, this is the same amount as the lump-sum payment you receive (the total of your contributions to the retirement system).” It may also include deemed deposits and redeposits that OPM advanced, which “are taxable to you in the year of retirement”, so “Your taxable amount may therefore be more than the lump-sum payment you receive.”
Line 2 is not something you compute from a table in the publication: “The present value of your annuity contract is figured using actuarial tables provided by the IRS.” The publication says that if you are receiving the payment, you can write to the IRS Actuarial Group at the address it prints in the section on the alternative annuity option to find out the present value.
How the taxable part is treated
The taxable part goes in income in the year received: “You must include the taxable part of the lump-sum payment in your income for the year you receive the payment unless you roll it over into another qualified plan or an IRA.” It is not a capital-gain or ten-year-option distribution: “The taxable part of the lump-sum payment doesn’t qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option.” On the return, “Add any actual or deemed payment of your lump-sum credit (defined earlier) to the total for Form 1040, 1040-SR, or 1040-NR, line 5a.” Withholding is covered on the 20 percent pension lump-sum withholding page.
The IRS example: David Brown
The publication’s example is “David Brown retired from the federal government in 2025, 1 month after his 55th birthday.” “The present value of his annuity contract is $155,000.” Recomputed line by line:
| Line | Entry | Amount |
|---|---|---|
| 1 | Lump-sum credit (cost in the plan at the annuity starting date) | $31,000 |
| 2 | Present value of the annuity contract | $155,000 |
| 3 | Line 1 divided by line 2 (computed) | 0.20 |
| 4 | Tax-free amount: line 1 times line 3 (computed) | $6,200 |
| 5 | Taxable amount (net cost in the plan): line 1 minus line 4 (computed) | $24,800 |
The publication prints the same results: “The taxable part ($24,800) is also his net cost in the plan, which is used to figure the taxable part of his reduced annuity payments.” His $6,200 tax-free part is not put on Worksheet A line 6. His reduced annuity is worked on Worksheet A.
Annuity starting date before November 19, 1996
Older starting dates follow different rules. The publication says “If your annuity starting date is before November 19, 1996, and you chose the alternative annuity option, the taxable and tax-free parts of your lump-sum payment and your annuity payments are figured using different rules.” This page covers the worksheet as printed for later dates and does not walk through the older rules.
Example with invented numbers
Illustration, not an IRS example. Every result is computed from invented inputs.
| Line | Entry | Amount |
|---|---|---|
| 1 | Lump-sum credit (invented) | $40,000 |
| 2 | Present value of the annuity contract (invented) | $160,000 |
| 3 | Line 1 divided by line 2 (computed) | 0.25 |
| 4 | Tax-free amount: line 1 times line 3 (computed) | $10,000 |
| 5 | Taxable amount: line 1 minus line 4 (computed) | $30,000 |
The tax-free part is one quarter of the credit, $10,000, and the taxable part, $30,000, is the net cost that goes on line 2 of Worksheet A.
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
- Putting the tax-free part from line 4 on Worksheet A, line 6. The caution on line 4 says not to.
- Entering the lump-sum payment you received on line 1 when deemed deposits or redeposits increase the lump-sum credit.
- Guessing the present value on line 2. The publication says it comes from IRS actuarial tables.
- Treating the taxable part as eligible for capital gain treatment or the ten-year option. The publication says it is not.
Related: Publication 721, Form 1040 lines 5a and 5b, and FERS disability retirement.
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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.