Withholding for Pension Administrators
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.
Which Benefits Will be Taxed?
Under Michigan law, qualifying pension and retirement benefits include most payments that are reported on a 1099-R for federal purposes such as: defined benefit pensions, IRA distributions, and most payments from defined contribution plans and 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.
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.
The changes in tax treatment do not apply to Social Security, Military or Railroad Retirement benefits.
Who is Impacted by the Changes?
For joint filers, the age of the oldest spouse determines the age category.
Pension recipients born before 1946:
- All qualifying benefits from public sources are exempt.
- Qualifying benefits from private sources may be deducted up to $54,404 for single/married filing separate filers and $108,808 for married filing joint for tax year 2021.
- Any qualifying private pension payment in excess of the limits mentioned above is taxable.
Pension recipients born during the period 1946 through 1952:
- Recipients born in years 1946 - 1952 will be eligible for the Michigan standard deduction against all income instead of deducting pension or retirement benefits for tax year 2021. The standard deduction is $20,000 for taxpayers filing single or married filing separate and $40,000 for taxpayers filing jointly.
- Filers who receive qualifying pension benefits from employment with a governmental agency exempt from the Social Security Act see "Benefits from Employment that was Exempt from Social Security" below.
Pension recipients born after 1952:
- Recipients born during the period January 1, 1953 through January 1, 1955, will be eligible for the Michigan standard deduction against all income instead of deducting pension or retirement benefits for tax year 2021. The standard deduction is $20,000 for taxpayers filing single or married filing separate and $40,000 for taxpayers filing jointly. Exception: If you are a surviving spouse who has reached the age of 67, has not remarried, and claimed a subtraction for retirement and pension benefits on a return jointly filed with the decedent in the year they died, you may elect to take the retirement and pension benefits subtraction based on the older deceased spouse's year of birth subject to the limits available for a single filer instead of your standard deduction.
- Recipients born after January 1, 1955 but before January 2, 1960 who have reached age 62 and receive retirement benefits from employment exempt from Social Security may deduct up to $15,000 in qualifying retirement and pension benefits. If both spouses on a joint return receive Social Security exempt retirement benefits, the maximum deduction increases to $30,000.
- Recipients born after January 1, 1955, received retirement benefits from SSA exempt employment, and were retired as of January 1, 2013 may deduct up to $35,000 in qualifying retirement and pension benefits if single or married filing separately or $55,000 if married filing a joint return. If both spouses on a joint return qualify, the maximum deduction increases to $70,000.
- All other recipients born after January 1, 1955, all retirement and pension benefits are taxable and you are not entitled to a pension subtraction
Withholding Guide/MI W-4P
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 2, 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 8, withhold based on the number of exemptions claimed on line 9 and/or any percentage claimed on line 10. 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)
2022 Withholding Information
Withholding Rate: 4.25%
Personal Exemption Amount: $5,000
Below are Withholding Tax Tables for the specific payroll schedule/frequency identified:
ONLY used for pension recipients born during the period 1946 through 1952 who have checked box 3 on MI W-4P.
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…………$408.33
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 $2,200 (-) Single Pension Deduction $1,666.67 = $533.33
$533.33 (-) ($408.33 x 1 Exemption) = $125.00
$125.00 x 4.25% = $5.31 Monthly Withholding
No MI W-4P Received
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.
Benefits from Employment that was Exempt from Social Security
Recipients born between January 1, 1946 and December 31, 1952 and recipients born after 1945 who were retired on January 1, 2013 who receive qualified 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 2018 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 years 1946 - 1952 may claim a Michigan standard deduction of $35,000.
- Joint filers where the older spouse was born in years 1946 - 1952 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.
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.
Filers born after 1952 who have reached the age of 62.
- Beginning January 1, 2018, recipients born after 1952 who received qualified retirement benefits from employment that exempt from SSA and were retired as of January 1, 2013, may deduct $35,000 for single or married filing separately filers or $55,000 for joint filers of retirement and pension benefits. If both spouses on a joint return qualify, the maximum deduction increases 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%
2021 Withholding = [Pension subject to tax – monthly pension deduction – (allowance per exemption x number of exemptions)] x 4.25%
For 2021 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 = $4,900/12 = $408.33 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 here or the completed application may be mailed to the address listed on the form.