Marge Martin, Vice President, Aon Consulting, pointed out that pension payments are not eligible for the Making Work Pay credit, so the withholding reduction on the distributions could lead to underpayment penalties when filing 2009 taxes. Aon has told plan administrators they may want to add a warning about the potential consequences of the new pension withholding threshold when changing notices.
Martin also called to attention that the model notice in withholding regulations states “no Federal income tax will be withheld if the taxable amount of your annual pension payments is less than $5,400.” For the standard periodic payment withholding based on “married, 3 exemptions”, the annual threshold that triggers withholding under the revised tables is $26,880 (compared to $19,200 prior to the adjustment). So, for the remainder of 2009, $26,880 should be substituted for $5,400 in the notice.
The IRS in February released new withholding tables that incorporate the new “Making Work Pay” credit – a provision of the American Recovery and Reinvestment Act of 2009 (see IRS Releases Tax Withholding Tables to Reflect Stimulus Bill Provision ).
Publication 15-T is at http://www.irs.gov/pub/irs-pdf/p15t.pdf .
Tax analysts at Thomson Reuters recently warned that certain employees (e.g., an employee with more than one job, or an employee who is married with combined income that will put him or her in a higher tax bracket) are advised in the notice that they may need to file a new Form W-4 with their employer because the amount of the withholding tax reduction could be significantly different than the credit that they can claim on their 2009 personal income tax return (see W-4 Revisions May Be Needed to Work out Stimulus Credit ).