By Pension and Benefits Editorial Staff
The IRS has issued proposed regulations with rules for federal income tax withholding on certain periodic retirement and annuity payments to implement an amendment made to Code Sec. 3405(a)(4) section 11041(c)(2)(G) of the Tax Cuts and Jobs Act (TCJA, P.L. 115-97). The proposed regulation:
- would provide that, if no withholding certificate is in effect, the default withholding rate on periodic payments is determined in the manner described in applicable IRS forms, instructions, publications, and other prescribed guidance; and
- would remove certain provisions that reflect the rule prior to amendments made by the TCJA.
Withholding on periodic payments. Under Code Sec. 3405, income tax withholding is required for taxable payments from an employer-sponsored pension, annuity, profit-sharing, stock bonus, or other deferred compensation plan, unless the payee elects not to have tax withheld. With certain exceptions, withholding on annuity and similar periodic payments is treated like withholding on wages paid to an employee.
Before the TCJA, if a withholding certificate (Form W-4P, Withholding Certificate for Pension or Annuity Payments) was not in effect for a periodic payment, the default withholding rate on the payment was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended Code Sec. 3405(a)(4) so that the default withholding rate on a such periodic payment is determined under rules prescribed by the Treasury Secretary.
Current IRS guidance has continued to determine the default withholding rate on a periodic payment not covered by a withholding certificate by treating the payee as a married individual claiming three withholding allowances, and applying that status when referring to the applicable withholding tables and computational procedures in the 2020 IRS Pub. 15-T (Federal Income Tax Withholding Methods).
The proposed regulations are intended to provide a flexible and administrable rule, so that the IRS can quickly update applicable IRS forms, instructions, publications, and other guidance as needed, and provide payers and plan administrators adequate time to program their systems to withhold the proper amount of tax on periodic payments.
Applicability date. The proposed regulations are to apply to periodic payments made after December 31, 2020. Taxpayers may rely on the rules provided in the proposed regulations in their entirety until the date that final regulations are published.
Comments requested. Written or electronic comments and requests for a public hearing must be received by July 27, 2020. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-100320-20). Send paper submissions to: CC:PA:LPD:PR (REG-100320-20), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. The IRS expects to have limited personnel available to process public comments that are submitted on paper through the mail. Until further notice, any comments submitted on paper will be considered to the extent practicable.
Source: 85 FR 31714.
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