IRS Floats Plan to Update Withholding Rules for Annuity Payments

The Treasury Department and the Internal Revenue Service issued a proposed regulation Wednesday updating the federal income tax withholding rules for periodic retirement and annuity payments made after Dec. 31.

Chris Shankle, senior vice president at Argent Retirement Plan Advisors and a member of the AICPA Employee Benefits Tax Technical Resource Panel, told ThinkAdvisor in a Wednesday email message that, prior to the proposal, “the withholding process was to treat everyone as married with three exemptions. In this manner recipients could specify the withholding needed by referring to worksheets, online tools and the completing of a specified withholding election form to arrive at a ‘better fit’ for their situation.”

In Notice 2020-3, the IRS provided that, for 2020 the default rate of withholding on periodic payments will continue to be based on treating the taxpayer as a married individual claiming three withholding allowances when no withholding certificate is in effect.

Under the proposed regulation for 2021 and future calendar years, the Treasury Department and the IRS will provide the rules and procedures for determining the default rate of withholding on periodic payments when a taxpayer has no withholding certificate in effect in applicable forms, instructions, publications and other guidance.

Prior to the Tax Cuts and Jobs Act of 2017, if no withholding certificate was in effect for a taxpayer’s periodic payments, the amount to be withheld from the payments was determined by treating the taxpayer as a married individual claiming three withholding exemptions.

The tax law amended the rule to provide that the rate of withholding on periodic payments when no withholding certificate is in effect would instead be determined under rules prescribed by the treasury secretary.

— Check out Be Not Afraid: Tax-Aware Retirement Planning Is Not ‘Tax Advice’ on ThinkAdvisor.