Withholding for Pension Recipients Frequently Asked Questions (FAQs)

General Information
  1. At what rate will my pension be taxed?

    The tax rate for 2016 is 4.25%

  2. What are my responsibilities as a pension recipient?

    It is your responsibility to contact your pension administrator to ensure taxes are being withheld from your pension payments, whether you submit an MI W-4P or not.

  3. If I am not a resident of Michigan but receive a Michigan pension, is my pension taxable to Michigan?

    No. If you receive the MI W-4P from your pension administrator, return indicating you are not a resident of Michigan and mark box 1.

Back to Top

MI W-4P
  1. When should I complete the MI W-4P?

    Complete and submit form MI W-4P to your pension/annuity administrator before distributions are paid.

  2. Can I change my MI W-4P if I have already submitted it to my pension/annuity administrator?

    Yes. You may change your elections on the MI W-4P at any time by submitting an updated MI W-4P to your pension/annuity administrator.

  3. If my pension/annuity is exempt from Michigan tax, can I opt out of Michigan withholding?

    Yes. If your pension/annuity is exempt from Michigan tax, you can opt out of Michigan withholding by checking box 1 on the MI W-4P.

  4. When I complete the MI W-4P, which box should I check if I am a widow(er) or divorced?

    Single.

Back to Top

Pension Administrators
  1. Is every pension/annuity administrator required to withhold Michigan tax?

    Only companies that fall under Michigan taxing jurisdiction are required to withhold Michigan tax from your pension/annuity distributions.

  2. How do I know if my pension/annuity administrator falls under Michigan jurisdiction?

    Contact your pension/annuity administrator.

  3. What if my pension administrator does not fall under Michigan jurisdiction?

    If your pension/annuity administrator does not fall under Michigan jurisdiction, you may request to have tax withheld, but the company is not required to do so. If no taxes are withheld from your distribution, make estimated payments in place of the withholding. For more information on estimated payments, see MI 1040ES.

Back to Top

Distributions and Contributions
  1. Is an early distribution eligible for a Michigan tax exemption?

    No. Early distributions are taxable pension/annuity benefits and are subject to withholding.

  2. Will Michigan withholding be taken from my pension received from the Pension Benefit Guaranty Corporation (PBGC)?

    No. The PBGC withholds federal taxes but does not withhold state taxes. Make estimated payments in place of the withholding. For more information on estimated payments, see 
    MI 1040ES

  3. I am retired from a company that terminated its pension plan and transferred the pension obligations to an insurance company. I am now receiving a distribution from the insurance company under a group annuity plan. Is my distribution still a “retirement or pension benefit”?
    The annuity plan distribution from the insurance company continues to be a retirement or pension benefit. For more information and assistance in calculating your subtraction, see Pension Information.
     
  4. Tier 1 Taxpayers. Plan recipients who are tier 1 taxpayers (the recipient or his or her spouse born before 1946) are limited to the private pension amounts of $47,309/single filer and $94,618/joint filers for the “retirement or pension benefits” deduction.

    Example 1. Mike is a Michigan taxpayer who was born in 1945. Mike is married to Meg who was born in 1949. Mike receives pension benefits from an IRC 401(a) qualified annuity plan. Mike and Meg may deduct up to $94,618 from their adjusted gross income on their joint Michigan returns because Mike (the older spouse) was born before 1946.

    Tier 2 Taxpayers. Plan recipients who are tier 2 taxpayers (the recipient or his or her spouse born 1946 through 1952) may deduct up to $20,000/single filer or $40,000/joint filers. At age 67, the deduction limitations no longer apply, so taxpayers are then eligible for a $20,000/single filer or $40,000/joint filer deduction against all types of income.

    Example 2. Mary is a Michigan taxpayer who was born in 1950. Mary is married to Joe who was born in 1946. Mary receives pension benefits from an IRC 401(a) qualified annuity plan. Mary and Joe may deduct up to $40,000 from their adjusted gross income on their joint Michigan returns because Joe (the older spouse) was born in 1946. When Joe is 67, they may deduct $40,000 against all types of income. The deduction is no longer restricted to income from retirement or pension benefits.

    Tier 3 Taxpayers. Plan recipients who are tier 3 taxpayers (the recipient or his or her spouse born after 1952) do not qualify for a “retirement or pension benefits” deduction. At age 67, these taxpayers are eligible for the $20,000/single filer or $40,000/joint filer deduction that is not restricted to income from “retirement or pension benefits.”

    Example 3. Drew is a Michigan taxpayer who was born in 1955. Drew is married to Kate who was born in 1960. Drew receives pension benefits from an IRC 401(a) qualified annuity plan. Drew and Kate do not qualify for a retirement or pension benefits deduction. However, when Drew is 67, they may, as joint filers, deduct $40,000 from all types of income.

    If I made nondeductible contributions to my pension or IRA, will the money be taxed again upon distribution from the pension or IRA?
    No. As long as these contributions are excluded from your Federal Adjusted Gross Income when they are distributed from the pension or IRA. These contributions are usually reported on a separate line of your 1099-R.

Back to Top

Subtractions
  1. Is a rollover from a regular IRA to a Roth IRA an allowable subtraction?

    You may qualify for a subtraction if you were born prior to 1953.  The amount of the subtraction may be limited based on your year of birth.

    Choose the appropriate category below to determine the subtraction limitations.
    Note: For joint filers, use the year of birth of the oldest spouse.

    Recipients born before 1946
    Recipients born during the period January 1, 1946 through January 1, 1950
    Recipients born after January 1, 1950 through December 31, 1952
    Recipients born after 1952

    For more information and assistance in calculating your subtraction, see Pension Information

  2. Is a distribution from a Roth IRA an allowable subtraction?

    No. Distributions from a Roth IRA are already excluded from income on your federal return and therefore may not be subtracted on the Michigan return.

  3. Is a distribution from deferred compensation plan an allowable subtraction?
    Distributions from an employer plan that contain only deferred compensation are not an allowable subtraction, including the following:

     
    • Distributions from a 401(k) or 403(b) plan that allows the employee to set the amount of compensation to be deferred and does not prescribe retirement age or years of service 
    • Distributions from a 457 plan
    • Distributions that are reported as wages on a form W-2

           Subject to limitations based on age and year of birth, the following may qualify as an
           allowable subtraction:


                      Distributions from a 401(k) or 403(b) plan are a qualified retirement and pension benefit if
                      they are the result of the employer's contributions only or both employer contributions and
                      employee contributions mandated by the plan. Employee's contributions required by the
                      plan to obtain an employer match are considered mandated.

Note: Distributions attributable to employee contributions that were not mandated
by the plan are not eligible for a subtraction.

Qualification for a subtraction is a two-step process.
Use the distribution chart and the information above (step one) to determine whether your retirement
and/or pension benefits qualify as a subtraction. Then use the appropriate year of birth category (step two). You must meet both qualification requirements to be eligible for a subtraction.

Step One: 
Refer to box 7 on form 1099-R for your distribution code.

Form 1099-R reports the total retirement and pension benefits you received during the year. The distribution code(s) describes the condition under which the retirement and pension benefits were paid. The chart below lists distribution codes and generally describes eligibility of benefits for subtraction based on each code. Some exceptions exist. If your distribution code is not included in the list below or if you have questions on eligibility of your benefits, consult your tax professional.

Step Two:
Choose the appropriate category below. 
Note: For joint filers, use the year of birth of the oldest spouse.
 

Recipients born before 1946 
Recipients born during the period January 1, 1946 through January 1, 1950
Recipients born after January 1, 1950 through December 31, 1952
Recipients born after 1952

For more information and assistance in calculating your subtraction, see Pension Information.

      4.  What is the eligible subtraction for pension benefits from employment with a government
           agency that was exempt from Social Security?

Employment that is not covered by the federal Social Security Act (SSA) means 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 retirement and pension 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. Federal retirees hired since 1984 and those covered by the Federal Employees’ Retirement System are covered under the SSA.

SSA Exempt pension and retirement benefits from employment with a government agency are eligible for a subtraction (or an additional subtraction) up to $15,000 per eligible taxpayer.  Note: For joint filers, use the year of birth of the oldest spouse.

If the older of you or your spouse (if married filing jointly) was born on or after January 1, 1953 but before January 2, 1955, have reached age 62 and receive Social Security exempt retirement benefits due to employment with a governmental agency. You may be eligible for a retirement and pension deduction.  For more information see Michigan Pension Schedule, section D.

To incorporate this larger subtraction into the withholding from your retirement or pension benefits, complete an MI W-4P and check box 4. Then submit the MI W-4P to your pension administrator.

Back to Top

Which Benefits are Taxable?
  1. How will my pension administrator know what portion of my benefits are taxable?

    The choices selected on the MI W-4P (birth year, SSA exemption, etc.) will indicate what portion of your benefits are taxable.  In the absence of an MI W-4P, pension administrators are advised to 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.

2. If I file a joint return, which year of birth will determine my eligible pension and retirement subtraction?
For joint returns, use the year of birth of the oldest spouse to determine the pension subtraction, regardless of which spouse actually receives the pension.

Recipients born during the period January 1, 1946 through January 1, 1950
Recipients born after January 1, 1950 through December 31, 1952
Recipients born after 1952

Back to Top

Information on Deceased Spouses
  1. What retirement or pension benefit subtraction can I claim if I am receiving survivor benefits from my deceased spouse?

    If the deceased spouse was eligible for a retirement or pension subtraction, then the surviving spouse is eligible for a subtraction.

    The surviving spouse may continue to claim the subtraction even if the spouse remarries. The surviving spouse benefit subtraction only applies to distributions from the deceased spouse’s retirement or pension plan. After the death of one spouse, the retirement or pension subtraction that the surviving spouse receives as a result of his or her own employment is based on the surviving spouse’s own date of birth. The retirement or pension subtraction the surviving spouse receives as a beneficiary of the decedent’s retirement or pension plan is based on the date of birth of the decedent. Once the surviving spouse reaches age 67, they are no longer eligible for a retirement or pension subtraction and instead are eligible for a “standard deduction” of $20,000 against all income.  Restrictions apply if deductions are taken for military income or railroad/Michigan National Guard retirement or pension.