IRS Provides Final Regulations on Income Tax Withholding on Certain Periodic Retirement & Annuity Payments

Paul Ogawa
October 24, 2020

The IRS recently issued final regulations relating to the withholding rate on certain periodic retirement and annuity payments. This change was initiated by Section 3405(a)(4) of the Tax Cuts and Jobs Act (“TCJA”) and in part replaces the default rate for withholding on periodic payments under Section 3405(a) of the Code. Originally based on treating the payee as a married individual claiming three withholding allowances between calendar years 2018 to 2020, the new default rate will apply to periodic payments made after December 31, 2020 and will be determined in the manner described in the applicable forms, instructions, publications, and other guidance prescribe by he Commissioner. The final regulations do not prescribe a specific default rate in order to provide a flexible and administrable rule that allows the Treasury Department to make updates quickly, address legislative changes, and provide payors adequate time to adjust their systems.

The IRS also provided insight into the redesigned 2021 Form W-4P. Intended to align with the redesigned Form W-4 issued earlier in the year, the IRS learned through comments received on the 2021 draft Form W-4P that payors required additional time to implement the new form and default withholding rate that made finalizing the 2021 draft W-4P impractical. As a result, the 2021 Form W-4P will be more similar to the 2020 Form W-4P, and will utilize a default rate on periodic payments by treating the taxpayer as a married individual claiming three withholding allowances.

To review this information and the final regulations discussed above, please click here.

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Author

Paul Ogawa

Paul Ogawa is a Senior Regulatory Counsel at Sovos Compliance. As part of the Regulatory Analysis team, his main areas of focus are state and federal tax withholding, the Affordable Care Act (ACA), and Canadian tax information reporting. Prior to Sovos, Paul worked as a litigation attorney in Boston area law firms, representing clients in insurance subrogation claims, family law matters, and employment disputes. Paul is a member of the Massachusetts Bar, earned his B.A. from Brandeis University and his J.D. from the Suffolk University Law School.
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