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 2019 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 and submit form MI W-4P to your pension/annuity administrator before distributions are paid.
- 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.
- 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.
- When I complete the MI W-4P, which box should I check if I am a widow(er) or divorced?
Under "Marital Status" check the box for "Single".
- 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. You have the option to opt out of withholding. Consult with your tax professional as this may result in a balance due on your MI-1040 as well as penalty and/or interest.
- How do I know if my pension/annuity administrator falls under Michigan jurisdiction?
Contact your pension/annuity administrator.
- 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 Michigan taxes are not withheld from your distribution, make estimated tax payments in place of the withholding. View estimated tax payments for more information or see MI-1040ES Voucher.
- Is an early distribution eligible for a Michigan tax deduction?
No. Early distributions are taxable pension/annuity benefits and are subject to withholding.
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.
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 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.
- 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 December 31, 1952
Recipients born after 1952
For more information and assistance in calculating your subtraction, see Pension Information
- 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.
- 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
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 information above and the distribution chart to determine whether your retirement and/or pension benefits qualify as a subtraction (step one). Then use the appropriate age category (step two). You must meet both qualification requirements in order to be eligible for a retirement and/or pension benefits subtraction.
If you do not qualify based on the distribution chart in step one, then you do not have a qualified subtraction and step 2 is not applicable.
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 Form 1099-R Distribution Code Chart lists the 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 or if you have questions on eligibility of your benefits, consult your tax professional.
Choose the appropriate category below.
Note: For joint filers, use the year of birth of the oldest spouse.
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.
A recipient who qualifies under both of the following conditions is entitled to increase the retirement or pension deduction or Michigan Standard Deduction up to $15,000 per eligible taxpayer.
• Born between January 1, 1946 and January 1, 1958, or is born after
December 31, 1952 and retired as of January 1, 2013 and
• Receives, or whose spouse receives, retirement or pension benefits
from employment with a governmental agency that was not covered
by the federal SSA.
View and answer these questions to determine if you qualify to check the SSA Exempt box on Schedule 1, lines 22C and/or 22F.
To incorporate this larger subtraction into the withholding from your retirement or pension benefits, complete an MI W-4P and check the appropriate box. Then submit the MI W-4P to your pension administrator.
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- 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%.
2. If I file a joint return, which year of birth will determine my eligible retirement and pension 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.
- Can I claim a retirement or pension benefit subtraction if I am receiving survivor benefits from my deceased spouse?
The retirement or pension benefit subtraction that a surviving spouse may claim is based on the birth year of the deceased spouse and the filing status of the surviving spouse.
If the surviving spouse was born during the period January 1, 1946 through December 31, 1952 and reaches age 67, the retirement or pension benefit subtraction cannot be claimed. Instead, the surviving spouse may claim a standard deduction against all income.
Note: Restrictions apply if deductions are taken for military income or railroad/Michigan National Guard retirement or pension.
Which Section of Form 4884 Should I Complete?
Using the information from line 8, complete Section A, Section B, Section C or Section D.
To determine which section of the form to complete, answer the following questions.
1. Were retirement or pension benefits received by a filer or spouse (if married filing jointly) born prior to January 1, 1953, or were surviving spouse benefits received for a deceased spouse who was born prior to January 1, 1953 and died prior to January 1, 2019?
Yes: Continue to question 2.
No: Continue to question 5.
2. Was the older of filer or spouse (if married filing jointly) born during the period January 1, 1946 through December 31, 1952?
Yes: Do not file Form 4884. Use Schedule 1, line 23 (see instructions, page 15).
No: Continue to question 3.
3. Was the older of filer or spouse (if married filing jointly) born prior to January 1, 1946?
Yes: Complete Section A of Form 4884.
No: Continue to question 4.
4. Is filer or spouse (if married filing jointly) receiving benefits from a deceased spouse who was born prior to January 1, 1946 and died prior to January 1, 2019?
Yes: Complete Section B of Form 4884.
No: Complete Section C of Form 4884.
5. Were benefits from SSA exempt employment received by a filer or spouse (if married filing jointly) who was born after 1952 and retired as of January 1, 2013?
Yes: Complete Section C of Form 4884.
No: Continue to question 6.
6. Were benefits from SSA exempt employment received by a filer or spouse (if married filing jointly), and either filer or spouse has reached age 62?
Yes: Complete Section D of Form 4884.
No: You are not eligible for a retirement or pension benefits subtraction. Do not file Form 4884.