IRS Publishes Final Regs on Periodic Retirement and Annuity Payments

IRS Publishes Final Regs on Periodic Retirement and Annuity Payments

Internal Revenue Service

The IRS has published final regulations (T.D. 9920) that provide rules for federal income tax withholding on some periodic retirement and annuity payments to implement an amendment made by the Tax Cuts and Jobs Act. Before amendment by the TCJA, section 3405(a)(4) provided that in the case of any periodic payment for which a withholding certificate is not in effect, the amount withheld from the periodic payment (the default rate of withholding) is determined by treating the payee as a married individual claiming three withholding exemptions. As amended by the TCJA, section 3405(a)(4) provides that the default rate of withholding on periodic payments is determined under rules prescribed by Treasury. The IRS issued proposed regs (<a href="/lr/resolve//2ckcn">REG-100320-20</a>) in May 2020 to update some provisions of reg. section 35.3405-1T, which still reflected the pre-amendment rule under section 3405(a)(4). The proposed regs provided that the default rate of withholding on periodic payments made after December 31, 2020, would be described in the applicable forms, instructions, publications, and other guidance. Commentators suggested that the default rate of withholding on periodic payments be a flat 10 percent rather than a rate based on federal income tax withholding on wages. As an alternative to a flat 10 percent rate, the commentators suggested that a new default rate of withholding on periodic payments apply prospectively only and have a January 1 (rather than a midyear) effective date that is at least two full years after the end of 2020. The IRS will consider the comments for future revisions to forms, instructions, publications, and other guidance regarding withholding on periodic payments, including changes to the Form W-4P, “Withholding Certificate for Pension or Annuity Payments.” The suggestions, however, would not require a change to the proposed regs, which didn’t specify a default withholding rate, an effective date for a new rate, or how a new default withholding rate should be applied. Thus, the final regs adopt the proposed regs without change.

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The IRS has published final regulations (T.D. 9920) that provide rules for federal income tax withholding on some periodic retirement and annuity payments to implement an amendment made by the Tax Cuts and Jobs Act.

The IRS has published final regulations (T.D. 9920) that provide rules for federal income tax withholding on some periodic retirement and annuity payments to implement an amendment made by the Tax Cuts and Jobs Act. Before amendment by the TCJA, section 3405(a)(4) provided that in the case of any periodic payment for which a withholding certificate is not in effect, the amount withheld from the periodic payment (the default rate of withholding) is determined by treating the payee as a married individual claiming three withholding exemptions. As amended by the TCJA, section 3405(a)(4) provides that the default rate of withholding on periodic payments is determined under rules prescribed by Treasury. The IRS issued proposed regs (REG-100320-20) in May 2020 to update some provisions of reg. section 35.3405-1T, which still reflected the pre-amendment rule under section 3405(a)(4). The proposed regs provided that the default rate of withholding on periodic payments made after December 31, 2020, would be described in the applicable forms, instructions, publications, and other guidance. Commentators suggested that the default rate of withholding on periodic payments be a flat 10 percent rather than a rate based on federal income tax withholding on wages. As an alternative to a flat 10 percent rate, the commentators suggested that a new default rate of withholding on periodic payments apply prospectively only and have a January 1 (rather than a midyear) effective date that is at least two full years after the end of 2020. The IRS will consider the comments for future revisions to forms, instructions, publications, and other guidance regarding withholding on periodic payments, including changes to the Form W-4P, “Withholding Certificate for Pension or Annuity Payments.” The suggestions, however, would not require a change to the proposed regs, which didn’t specify a default withholding rate, an effective date for a new rate, or how a new default withholding rate should be applied. Thus, the final regs adopt the proposed regs without change.

Sec. 3405 Special rules for pensions, annuities, and certain other deferred income

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IRS Publishes Final Regs on Periodic Retirement and Annuity Payments