San Francisco Tax Preparation / CPA: Interim Guidance on 2020 Withholding from Retirement and Annuity Distributions
The IRS has issued interim guidance for the 2020 calendar year on income tax withholding from periodic payments for pensions, annuities, and certain other deferred income under Code Sec. 3405(a). Under the guidance:
- information requested for periodic payments on the 2020 Form W-4P, Withholding Certificate for Pension or Annuity Payments, will generally continue to parallel the information requested on Form W-4 prior to 2020 (other than the no-withholding election on Line 1);
- payees of periodic payments can use either the Form W-4P worksheets or the IRS Tax Withholding Estimator ( www.irs.gov/W4App) to determine their entries on 2020 Form W-4P; and
- certain withholding tables and computational procedures in the new 2020 Publication 15-T, Federal Income Tax Withholding Methods, that apply to a 2019 or earlier Form W-4 will also work with the 2020 Form W-4P.
The guidance also includes the withholding rules for when the payee has not furnished a withholding certificate to the payor (i.e., the “default” rate of withholding).
Redesigned W-4, New Pub. 15-T
Before 2020, information requested on Form W-4P generally paralleled the information requested on Form W-4 for wage withholding. For 2020, however, the IRS has redesigned Form W-4, Employee’s Withholding Certificate, so that the information requested no longer parallels that on Form W-4P. Among other things, the redesigned Form W-4 asks for the employee’s filing status instead of marital status, and no longer asks for the number of withholding allowances the employee is claiming. Because of this, new 2020 Publication 15-T, Federal Income Tax Withholding Methods, will provide withholding tables and computational procedures that the IRS has designed to work with both a 2019 or earlier Form W-4 and the redesigned 2020 Form W-4.
The IRS plans to provide in the 2020 Publication 15-A, Employer’s Supplemental Tax Guide, that the 2020 Form W-4P will work with the applicable withholding tables and computational procedures in the 2020 Publication 15-T.
Default Withholding Rate
The Tax Cuts and Jobs Act ( P.L. 115-97) amended Code Sec. 3405(a)(4) so that the default withholding rate for periodic payments when the payee does not furnish a withholding certificate to the payor “shall be determined under rules prescribed by the Secretary.” Before the amendment, the payor determined the appropriate withholding amount by treating the payee as a married individual claiming three withholding exemptions. Recent prior interim guidance has provided that the default withholding rate for 2018 and 2019 would parallel the rules for prior years ( Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038).
For 2020, default withholding rate will continue to parallel the prior years’ rules. The payor will treat the payee as a married individual claiming three withholding allowances, and will apply that status to the applicable withholding tables and related computational procedures in the 2020 Publication 15-T. Further, the IRS is considering whether the existing default withholding rate for periodic payments will continue to be appropriate after 2020.