Withholding for Pension Administrators
- Which Benefits Will be Taxed?
- Who is Impacted by the Changes?
- Withholding Guide / MI W-4P
- Withholding Formula
- No MI W-4P Received
- Benefits from Employment that was Exempt from Social Security
- Registration Process
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.
Under Michigan law, qualifying pension and retirement benefits include most payments that are reported on a 1099-R for federal purposes. This includes defined benefit pensions, IRA distributions, and most payments from defined contribution plans. Payments not reported in federal 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 not taxable.
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 are taxable under Michigan law.
The changes in tax treatment do not apply to Social Security, Military or Railroad Retirement benefits.
For couples, the age of the oldest spouse determines the age category.
Pension recipients born before 1946:
- All benefits from public sources are exempt.
- Benefits from private sources may be deducted up to $48,302 for single/married filing separate filers and $96,605 for married filing joint.
- Any private pension payment in excess of the limits mentioned above is taxable.
Pension recipients born during the period 1946 through 1952:
- For recipients filing single or married filing separate, the first $20,000 of their pension (public/private) is subtractable from Michigan taxable income.
- For filing joint, the first $40,000 of their pension (public/private) is subtractable from Michigan taxable income.
- Recipients born in 1946, or with an older spouse born in 1946, will be eligible for the Michigan standard deduction instead of deducting pension or retirement benefits for tax year 2013. However, the withholding tables will continue to be used so that these recipients have the correct amount of income tax withholding.
Pension recipients born after 1952:
- All private and public pension and annuity benefits are fully taxable and may not be deducted from Michigan taxable income.
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 5 and/or any percentage claimed on line 6. 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, 2014
MI W-4P Form and Instructions
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…………$329.17
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%.
Pension Payment $2,100 (-) Single Pension Deduction $1,666.67 = $433.33
$433.33 (-) ($329.17 x 1 Exemption) = $104.16
$104.16 x 4.25% = $4.43 Monthly Withholding
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.
Recipients born between January 1, 1946 and December 31, 1952 who receive 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 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 1946 may claim a Michigan standard deduction of $35,000.
- Joint filers where the older spouse was born in 1946 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.
- Single filers (or married, filing separately) born between 1947 and 1952 may deduct qualified pension and retirement benefits up to a maximum deduction of $35,000.
- Joint filers where the older spouse was born between 1947 and 1952 and one spouse has benefits due to qualified employment that was exempt from the SSA may deduct qualified pension and retirement benefits up to a maximum of $55,000. 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.
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%
For 2013 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 = $3,950/12 = $329.17 per exemption
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 at Michigan Business One Stop (www.michigan.gov/business) or the completed application may be mailed to the address listed on the form.