Withholding for Pension Recipients Frequently Asked Questions (FAQs)
- General Information
- Form MI W-4P
- Pension Administrators
- Payments/Distributions and Contributions
- Which Benefits are Taxable?
- Information on Deceased Spouses
- At what rate will my pension be taxed?
The tax rate for 2016 is 4.25%
- 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.
- 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.
- When should I complete the MI W-4P?
Complete form MI W-4P and give it to the administrator of your pension or annuity payments as soon as possible.
- Can I change my MI W-4P if I have already submitted it to my pension administrator?
Yes, you may change your elections on the MI W-4P at any time by submitting and updated MI W-4P to your pension administrator.
- I was born in 1947. Can I send the MI W-4P to my IRA administrator requesting that they do not withhold state income tax?
Any person regardless of age can opt out of pension withholding by checking box 1 on the MI W-4P.
- Prior to 2012, I was able to designate a specific amount to be withheld from my qualified pension plan for State Withholding Tax. The current MI W-4P requires a percentage. Will the form be changed in the future to allow a specific dollar amount for withholding?
A new form MI W-4P became available during 2013 that allows a recipient to designate voluntary withholding as either an amount or a percentage. Check with your pension administrator to see if they can accommodate your request.
- My marital status is one of the following: A widow(er) or divorced. When I complete the MI W-4P, which box should I check?
- Is every pension administrator required to withhold Michigan tax?
Only companies over whom Michigan has taxing jurisdiction are required to withhold Michigan tax from your pension and/or annuity payments.
- How do I know if my pension administrator falls under Michigan jurisdiction?
Contact your pension administrator.
- What if my pension administrator does not fall under Michigan jurisdiction?
If your pension 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 payments, it is likely you will be required to make estimated payments in place of the withholding. For more information on estimated payments, see MI 1040ES.
- If I take an early distribution, does the new pension law apply to me?
Early distributions are taxable pension distributions subject to withholding.
- I have a pension that I receive from the Pension Benefit Guaranty Corporation (PBGC). Will state tax withholding be taken from those pension payments.
No, the PBGC withholds federal taxes but does not withhold state taxes. A taxpayer receiving a pension from the PBGC should plan to make quarterly payments for the expected tax liability.
- I am 60 years old. I 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,” or is it now a senior citizen annuity that I can’t deduct until I reach age 65?
The annuity plan distribution from the insurance company continues to be a retirement or pension benefit, so long as the annuity plan is a qualified plan under IDP 401(a). Deductions will be limited under the provisions of MCL 206.30(a).
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 post-tax contributions to my pension, will the money be taxed again?
No, as long as the contributions are excluded from your Federal Adjusted Gross Income. These contributions are usually reported on a separate line of your 1099-R.
- Can I subtract a rollover from a regular IRA to a Roth IRA
If you are 59 ½ in the year the rollover occurs, you may deduct the rollover as a pension deduction within the limits for deducting pension income.
- Can I subtract a distribution from a Roth IRA?
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.
- Can I subtract a distribution from deferred compensation?
- A 457 plan does not meet the qualifications for subtraction. You cannot subtract distributions from a 457 plan.
- Distributions from a 401(k) or 403(b) plan are deductible if they are the result of the employer's contributions or employee contributions required by the plan. Employee's contributions required by the plan to obtain an employer match are considered mandated. Amounts distributed 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 do not qualify as retirement and pension benefits.
- You may not subtract any distributions that are reported by the payer on a W-2 Form.
- What is the new subtraction for pension benefits from employment 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 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. Federal retirees hired since 1984 and those covered by the Federal Employees’ Retirement System are covered under the SSA.
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 SSA are entitled to a greater retirement/pension subtraction or Michigan Standard Deduction. If you or your spouse are SSA exempt this increases your maximum allowable subtraction by $15,000.
To incorporate this larger subtraction into the withholding from your pension or retirement benefits, complete an MI W-4P and check box 4. Then submit the MI W-4P to your pension administrator.
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- I was born on January 1, 1953 and receive pension or retirement benefits from employment with a governmental agency that was not covered by the federal Social Security Act (SSA). Am I eligible to claim a pension or retirement subtraction on my 2014 Michigan return?
Individuals born after 1952 are considered “Tier 3” when determining any allowable pension or retirement benefit deduction. In most cases Tier 3 filers are not eligible for a pension and retirement subtraction. However, a Tier 3 filer who reaches age 62 AND receives a pension or retirement from employment with a government agency that was not covered by the Social Security Act (SSA), is eligible to receive a pension or retirement deduction of up to $15,000 ($30,000 on a jointly filed return where both spouses receive pension or retirement benefits from employment that was not covered by the SSA). Following federal guidelines, an individual is considered to have reached age 62 on the day before their birthday. Individuals born on January 1, 1953 are considered age 62 on December 31, 2014.
How to claim
If you were born ON January 1, 1953 and you receive pension or retirement benefits from employment with a governmental agency that was not covered by the federal Social Security Act (SSA exempt), you may be eligible for a pension and retirement subtraction of up to $15,000 ($30,000 if you file a joint return and both you and your spouse receive pension or retirement benefits from SSA exempt employment). You will not be able to claim the deduction if your return is e-filed. Please paper file your 2014 Michigan return according to the following instructions.
Complete only page 1 of Form 4884 and write “Born January 1, 1953” at the top of the form. Determine your pension or retirement subtraction using the lesser of your total eligible pension or retirement benefits or $15,000 for a single filer or when one spouse of a jointly filed return has SSA exempt pension benefits. Claim the lesser of your total eligible pension or retirement benefits or $30,000 when both spouses of a jointly filed return receive SSA exempt pension benefits.
Claim this pension or retirement subtraction on Schedule 1, line 22 as a miscellaneous subtraction and write “Born January 1, 1953” as the description.
- If I am in the age bracket of 1946-1952, will my pension administrator know that the first $20,000 or $40,000 of my pension is not taxable?
The only way your pension administrator will know not to withhold on the first $20,000 or $40,000 of your pension is by receiving your completed MI W-4P. You will need to indicate your marital status and check box 3.
- What if I am married and my spouse was born before 1946 and I was born after 1946. Can I still subtract the full amount of my pension, or am I limited to the $40,000 maximum amount for joint returns?
For joint returns, the birth date of the oldest spouse is used to determine the pension subtraction, regardless of which spouse actually receives the pension. For example, if one spouse was born before 1946, the pension can be subtracted as described in Pension Recipients born before 1946. Similarly, if the older spouse was born between 1946 and 1952, the pension can be subtracted up to a maximum of $40,000, even if the spouse who actually receives the pension was born after 1952. View information for Pension Recipients born between 1946 and 1952.
- My spouse has passed away and I am receiving survivor retirement or pension benefits. What subtraction can I claim?
If the spouse who passed away could have subtracted the retirement or pension benefits while he or she were alive, then the surviving spouse may also subtract the benefits. 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.
Example. George and Alice are married. George was born in 1948 and Alice was born in 1953. George and Alice both retired in 2012 and began drawing pension benefits. In 2012, they can subtract up to $40,000 of retirement benefits because they file a joint return and George was born between 1946 and 1952.
In 2013, George dies. Alice is the beneficiary on his retirement account. After his death, Alice receives monthly survivor benefits from George’s plan as well as monthly benefits from her plan. Since George died in 2013, they can still file a joint return and subtract up to $40,000 retirement benefits because George was born between 1946 and 1952.
In 2014, Alice continues to receive benefits from both plans. Alice can subtract up to $20,000 of benefits she received from George’s plan because she is single and the benefits would qualify for the subtraction if George was still alive. She cannot subtract any benefits she receives from her own plan because she was born after 1952. If the survivor benefits from George’s plan terminate in a later year, Alice would no longer be able to claim any subtraction.
- My spouse was 67 when he passed away. I am receiving income from interest, dividends and capital gains. I am not yet 67 and I have not remarried; can I deduct the income from interest, dividends and capital gains?
Yes, if the spouse who passed away was 67 or older in 2012 then the un-remarried surviving spouse is also eligible to deduct the income from interest, dividends and capital gains. However, unlike retirement and pension benefits, the surviving spouse may not claim the deduction after remarriage.
Example. Tom and Mary are married. Tom was born in 1945 and Mary was born in 1947. They farmed their entire lives, and in 2010, they decided to retire. They sold their farm for $2M and lived off their savings.
In 2012, Tom died. Mary filed a joint return and reported $50,000 of income from interest, dividends, and capital gains. They can claim a deduction of $21,857, the maximum subtraction allowed on a joint return for the senior citizen’s interest, dividend, and capital gain deduction.
In 2013, Mary files a single return. She can claim a subtraction of $10,929 (as adjusted for inflation) for the interest, dividend, and capital gain deduction because she is the un-remarried surviving spouse of a senior citizen born before 1946, and she files single.
If Mary remarries in 2014 and files a joint return with her new husband, she no longer qualifies as a senior citizen for purposes of the senior citizen interest, dividend, and capital gain subtraction because she is remarried and was not born before 1946.