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Withholding Requirements for Pension Recipients
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. If your pension is affected by the 2012 law changes, it is your responsibility to contact your pension administrator to ensure taxes are being withheld from your pension payments.
What are Pensions and Retirement Benefits?
Under Michigan law, qualifying pension and retirement benefits include most payments that are reported on a 1099-R for federal tax purposes. This includes defined benefit pensions, IRA distributions and most payments from defined contribution plans.
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.
- Military pensions, Social Security & Railroad benefits continue to be exempt from tax.
- Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
Responsibilities of Taxpayers/Pensioners
Only companies over whom Michigan has taxing jurisdiction are required to withhold Michigan tax from your pension and/or annuity payment(s).
If your pension administrator does not fall under Michigan jurisdiction you may request to have Michigan tax withheld, but the company is not required to do so. If taxes are not withheld from your payments, it is likely you will be required to make estimated payments in place of the withholding. Contact your pension and/or annuity administrator to verify if tax will be withheld from your payments.
Filing MI W-4P
In the absence of an MI W-4P, pension administrators shall do one of the following:
- They will not withhold on benefits paid to 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%.
If you have more than one administrator you will need to submit a MI W-4P for each pension or annuity.
Your tax situation may change from year to year; you may want to evaluate your withholding each year. You can change the amount to be withheld by submitting an updated Form MI W-4P to your pension or annuity administrator at any time.
If you (and your spouse) receive multiple pension payments, your withholding on those payments may not cover your entire tax liability. Married couples where each spouse receives payments on their own pension may choose to have withholding calculated as if they were single on the MI W-4P and select one personal exemption in order to have sufficient withholding to cover their tax liability. Taxpayers with multiple pensions may need to consult the MI-1040ES or a tax advisor to ensure the proper amount is withheld or paid in estimated income tax payments.