Annual Tax Withholding Notice - Heightened Importance for 2018 Annual Tax Withholding Notice - Heightened Importance for 2018

Annual Tax Withholding Notice - Heightened Importance for 2018

Annually, retirement plans are supposed to provide benefit recipients an opportunity to update their federal income tax withholding for benefit payments that are not eligible rollover distributions. Specifically, the recipient of an employer pension or annuity benefit is entitled to choose not to have income tax withheld from the retirement plan payments (so long as the payments are not eligible rollover distributions). The benefit recipient makes the election on a Form W-4P for periodic and non-periodic payments (for a detailed discussion of federal withholding tax, see Publication 575 Pension and Annuity Income (2016), pp. 9-10). The withholding election remains in effect until the recipient changes or revokes the withholding election in place.
 
For periodic payments, unless the recipient chooses no withholding, the annuity or similar periodic payment will be treated like wages for withholding purposes. Therefore, if the payee does not provide a completed withholding certificate (Form W-4P or a similar form provided by the payer), federal tax will be withheld as if the payee is married and claiming three withholding allowances.

For non-periodic distributions, unless the recipient chooses no withholding, the withholding rate is 10% of the distribution (again, as long as the distribution is not an eligible rollover distribution). Using a Form W-4P, the recipient can choose to elect no withholding or that an additional amount of tax be withheld. 

For 2018, there is increased importance to provide an annual notice of withholding election to retirees and beneficiaries based upon the changes in individual income tax rates resulting from the federal tax bill, which was signed into law on Dec. 22, 2017. In particular, because there were changes to the tax rates and the brackets of taxable income to which the rates apply, it will be important for individuals to consider whether they want to change their withholding in order to align their withholding with the changes in the tax law. 

For further consideration, the tax bill also increased the standard deduction for individuals who do not itemize deductions in computing their taxable income and suspended the deduction for personal exemptions. Further, the tax bill increased the child/family tax credit and made significant changes to the amounts of itemized deductions a taxpayer may claim. 

Therefore, governmental retirement plans/systems should encourage retirees and beneficiaries to consider the extent to which the changes in the tax bill will affect them and to consult with their tax professionals to determine whether they want to change their federal tax withholding for periodic and non-periodic distributions (which are not eligible rollover distributions) for 2018. As of Dec. 26, 2017, the IRS announced it was working to develop guidance, including withholding guidance, to implement the new tax bill. The IRS’ announcement said the IRS anticipates releasing its initial withholding guidance in January 2018, and will encourage employers to implement the guidance beginning in February 2018. Until the new guidance is released, the IRS said employers should continue to withhold based on 2017 instructions.

Of course, if you have any questions or comments regarding the Annual Withholding Tax Notice, please do not hesitate to contact a member of our team: This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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