Taxable Benefit Income

• Deductions protect investment earnings from taxation. The Internal Revenue Service taxes earnings above the amount a federal employee contributes to a CSRS or FERS plan, as shown on a 1099R. A taxpayer keeps the earnings not taxable by rolling over the interest into a qualified plan or traditional IRA. The IRS's civil service deductions reduce the taxable amounts received by the retired federal employee.
  
  

Unrecovered Cost Deductions

• For an annuity begun before July 1, 1986, the federal employee deducts from retirement income the amounts paid into the federal plan that remain at his death. The IRS considers these amounts the employee's plan costs that have not been recovered by the employee. The IRS accepts the deductions as a miscellaneous itemized deduction on the retired employee's final tax return. The 2 percent adjusted gross income limit does not affect these amounts.
  
  

Estate Beneficiary's Lump-Sum Payment

• Lump-sum payments received by the beneficiary for the plan holder's estate after the plan holder's survivor dies can include unrecovered costs. The amounts paid into the account by the former federal employee that still remain in the account are not taxable. The beneficiary makes an unrecovered cost deduction.
  
  

Marital Deduction

• A federal employee, or her spouse, can claim an unlimited marital deduction for amounts in a joint and survivor annuity reserved for a spouse after a death. The retirement benefits pass to the spouse with the estate given to the spouse. The marital deduction, a generally unlimited deduction, takes out of taxable income both the cost and interest remaining in a retirement account included in the spouse's estate. Amounts gifted to a surviving spouse qualify for the deduction. Community property also qualifies. The IRS taxes mixed retiree and community property separately.
  
  

Voluntary Contributions

• For federal employee retired during the past year who made voluntary contributions, the employee treats additional benefits separately from the annuity benefits paid into the plan through the Office of Personnel Management. Deductions reduce the voluntary contribution amounts under the same rules that apply to the regular contributions. An employee reduces the taxable additional benefits amount by the cost of voluntary contributions he has not recovered.