The IRS has issued final regs updating the federal income tax withholding rules for certain periodic retirement and annuity payments made after Dec. 31, 2020.
Prior to the Tax Cuts and Jobs Act (TCJA, PL 115-97), if no withholding certificate was in effect for a taxpayer’s periodic payments, the amount to be withheld from the payments was determined by treating the taxpayer as a married individual claiming three withholding exemptions.
The TCJA amended this rule to provide that the rate of withholding on periodic payments when no withholding certificate is in effect (the “default rate of withholding”) would instead be determined under rules the IRS prescribed.
In May 2020, the IRS issued proposed regs that updated the income tax withholding rules for certain periodic retirement and annuity payments. See Proposed reliance regs on TCJA changes to periodic retirement payment withholding (05/27/2020).
Final regs provide guidance for 2021 and future calendar years.
The final regs adopt the proposed regs as final with no modifications.
The final regs specify that the IRS will provide the rules and procedures for determining the default rate of withholding on periodic payments in applicable forms, instructions, publications and other guidance.
The IRS also intends to provide in the instructions to the 2021 Form W-4P, Withholding Certificate for Pension or Annuity Payments, and related publications, that the default rate of withholding on periodic payments will continue to be determined by treating the taxpayer as a married individual claiming three withholding allowances.
The document released on Sept 28, 2020, was submitted to the Office of the Federal Register (OFR) and is on public display pending publication. The version of the final regs released on Sept. 28, 2020 may vary from the published regs if changes are made during the OFR process. The document published in the Federal Register will contain the official rules.
To continue your research on withholding on pensions, annuities or other deferred income see, FTC 2d/FIN ¶J-8500.
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