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Withholding for Pension Administrators

Withholding for Pension Administrators

 

Introduction

Effective January 1, 2012, Michigan’s tax treatment of pension and retirement benefits changed and these benefits are subject to income tax for many recipients. Michigan law requires the administrators of pension and retirement benefits to withhold income tax on payments that will be subject to tax.

Which Benefits Will be Taxed?

Under Michigan law, qualifying pension and retirement benefits include most payments that are reported on a 1099-R for federal purposes such as: defined benefit pensions, IRA distributions, and most payments from defined contribution plans and payments received before the recipient could retire under the provisions of the plan or benefits from 401(k), 457, or 403(b) plans attributable to employee contributions alone.  

Payments not reported in fedreal adjusted gross income are not taxable in Michigan and not subject to withholding. For example, distributions from a Roth IRA or a Roth 401(k) plan are generally not subject to pension withholding because those distributions are generally nox taxable.  

The changes in tax treatment do not apply to Social Security, Military or Railroad Retirement benefits.

Who is Impacted by the Changes? 

For joint filers, the age of the oldest spouse determines the age category.

Pension recipients born before 1946:

Pension recipients born during the period 1946 through 1952:

Pension recipients born after 1952:

Withholding Guide/MI W-4P

Withholding is required on taxable pension benefits. Pension administrators should follow the directions from pension recipients on any MI W-4P received.

  • If the recipient checked box 1, do not withhold.
  • If the recipient checked box 4, use the Income Tax Withholding Tables (Form 446-T) to calculate the appropriate withholding based on the number of exemptions designated.
  • If the recipient checked box 3, withhold based on the number of exemptions claimed on line 8 and/or any percentage claimed on line 9. For withholding calculation, refer to marital status marked on the form to determine the corresponding Single or Married Withholding Table of Monthly Deduction Amount for the 4.25% formula.

 

Pension Withholding Tables (form 446-T)
    Effective January 1, 2020  

 

MI W-4P Form and Instructions

Withholding Formula

ONLY used for pension recipients born during the period 1946 through 1952 who have checked box 3 on MI W-4P.

 

The taxable portion is determined by subtracting the pension deduction and personal exemption allowance.
Monthly Deduction Amounts
Single pension deduction…………$1,666.67
Married pension deduction…………$3,333.33
Personal exemption allowance…………$366.67
 
Withholding = [Pension or Retirement Payment subject to federal income tax – Payee pension deduction (Single or Married) – (Allowance per Exemption x Number of Exemptions)] x 4.25%.
Example:
Pension Payment $2,100 (-) Single Pension Deduction $1,666.67 = $433.33
$433.33 (-) ($366.67x 1 Exemption) = $66.66
$66.66 x 4.25% = $2.83 Monthly Withholding

 

No MI W-4P Received

In the absence of an MI W-4P, pension administrators shall do one of the following:

  • Do not withhold on benefits paid to pension recipients born before 1946 unless the benefits exceed private pension limits.
  • If the recipient was born in 1946 or after, withhold on all taxable pension distributions at 4.25 percent.

Benefits from Employment that was Exempt from Social Security

Recipients born between January 1, 1946 and December 31, 1952 and recipients born after 1945 who were retired on January 1, 2013 who receive qualified pension or retirement benefits from employment with a governmental agency that was not covered by the federal Social Security Act (SSA) are entitled to a greater retirement/pension deduction or Michigan Standard Deduction. Employment that is not covered by the SSA is employment where the worker did not pay Social Security taxes and is not eligible for Social Security benefits based on that employment. Almost all employment is covered by the federal SSA. The most common instances of pension and retirement benefits from employment that is not covered by Social Security are police and firefighter retirees, some federal retirees covered under the Civil Service Retirement System and hired prior to 1984, and a small number of other state and local government retirees.

The deduction limit is increased by $15,000 for each recipient with benefits due to qualified employment that was exempt from the SSA. The 2018 limits for the Michigan standard deduction or the deduction for pension and retirement benefits are as follows:

  • Single filers (or married, filing separately) born in years 1946 - 1952 may claim a Michigan standard deduction of $35,000.
  • Joint filers where the older spouse was born in years 1946 - 1952 and one spouse has benefits due to qualified employment that was exempt from the SSA may claim a Michigan standard deduction of $55,000. If both spouses have benefits due to qualified employment that was exempt from the SSA the couple may claim a Michigan standard deduction of $70,000.

If both spouses have benefits due to qualified employment that was exempt from the SSA the couple may deduct qualified pension and retirement benefits up to $70,000.

Filers born after 1952 who have reached the age of 62.

  • Beginning January 1, 2018, recipients born after 1952 who received qualified retirement benefits from employment that exempt from SSA and were retired as of January 1, 2013, may deduct $35,000 for single or married filing separately filers or $55,000 for joint filers of retirement and pension benefits. If both spouses on a joint return qualify, the maximum deduction increases to $70,000.

Withholding tables that incorporate these larger deductions are available. Pension administrators can also program the appropriate withholding amount using the formulas below for benefit recipients born after 1945 and before 1953.

Withholding = [Pension subject to tax – monthly pension deduction – (allowance per exemption x number of exemptions)] x 4.25%

2019 Withholding = [Pension subject to tax – monthly pension deduction – (allowance per exemption x number of exemptions)] x 4.25%

For 2019 the monthly pension deductions and personal exemption amounts are

Single pension deduction per month = $35,000/12 = $2,916.67
Married pension deduction per month = $55,000/12 = $4,583.33
Personal exemption allowance = $4,400/12 = $366.67 per exemption

Registration Process

Pursuant to MCL 206.703(1), any company, over whom Michigan has jurisdiction, is required to withhold Michigan tax from taxable pension and/or annuity payments. Therefore, these companies must register.

Companies, over whom Michigan does not have jurisdiction, but agree to withhold Michigan tax from pension and/or annuity payments for Michigan residents, will also need to register.

Pension administrators not currently registered for Michigan Withholding Tax need to complete Registration for Michigan Taxes (Form 518). This form may be completed online here or the completed application may be mailed to the address listed on the form.

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