Enactment of The Tax Cuts and Jobs Act changed the way taxes are calculated for many taxpayers in 2018, including retirees receiving monthly benefits from a pension plan. With the end of 2018 approaching, the IRS encourages everyone to review their withholding as soon as possible to ensure retirees have sufficient tax withholding from pension payments and avoid a surprise tax bill at filing time (or possibly penalties).
The IRS urges everyone (employees and retirees) to use their Withholding Calculator to determine if they need to update their federal withholding. Per the IRS article, Retirees: Avoid a Surprise Tax Bill; Get Enough Tax Taken Out of Pension Payments; IRS Withholding Calculator Can Help, “As noted in the Withholding Calculator’s step-by-step instructions, retirees should treat their pension like income from a job by entering the gross amount of each payment, how often they receive a payment (monthly, quarterly, etc.) and the amount of tax withheld so far this year.”
Pension plan sponsors and the payer of the pension benefits should be prepared to see changes in withholding elections. Retirees can update the amount withheld from their pension payments by submitting a new Form W-4P to the payer of the benefits.
A tax professional should be consulted if you or your retirees have questions regarding their specific tax withholding on pension payments from your company sponsored plan.
Reminder, if you are new to sponsoring a retirement plan and are unsure how to submit the federal tax withholding, check out our blog, How to Submit a Federal Tax Withholding Tax Deposit. Please contact Watkins Ross if you have questions about the process.