UPDATED: Annual Tax Withholding Notice – IRS Issues 2018 Tables UPDATED: Annual Tax Withholding Notice – IRS Issues 2018 Tables

UPDATED: Annual Tax Withholding Notice – IRS Issues 2018 Tables

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. 

UPDATE: On Jan. 11, 2018, the IRS released 2018 tax withholding tables to incorporate the changes from the tax bill, including the new tax rates, increased standard deduction, and repeal of personal exemptions.

The new tables are located here. The IRS advises employers should implement the new tables as soon as possible, "but not later than Feb. 15, 2018." In addition to the new tables, the IRS has also published a list of Frequently Asked Questions, which are located here.

The FAQs note the IRS is working on updating Form W-4. We certainly anticipate the IRS also will be updating Form W-4P as part of this process.

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: Robert GaussAudra Ferguson-AllenTara SciscoeLisa Erb Harrison or Lindsay Knowles.


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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