pension paperwork a head-spinner
I have begun filling out the paperwork to begin pension
payments from my old company. Everything was going swimmingly until
I hit the W-4P, the form used to establish withholding for pension
payments. Typically, the IRS has taken what would seem to be a simple
question and turned it into a labyrinth.
I did OK on the part about figuring out exemptions,
I think, but the second page threw me for a loop. For one thing,
it asks for "an estimate of your 2005 itemized deductions." It's
July! I have no idea what my deductions for the entire year will
be. Or even if I will use itemized deductions!
It also asks for an estimate of my 2005 "adjustments
to income." Again, it's July! Who knows? I'm also confused by the
section about "Multiple pensions/More than one income worksheet."
Since I'm still employed by another company, I guess that applies
to me, too. It's also a maze and I can't figure out why it's necessary.
Any help you can give me here on determining how withholding
is figured on pension payments would be greatly appreciated.
-- Desperate Doug
I sense your pain. Form
W-4P is used by a pension plan administrator to figure the amount
of tax to be withheld from periodic pension payments. It works much
the same way a Form W-4 does for salaries. In fact, the tax withholding
is based on the same tables as those used for wage withholding found
in Circular E.
You can also elect to not have any tax withheld or
to have a fixed-dollar amount of tax withheld. However, you cannot
have the fixed-dollar amount withheld without entering the number
of allowances on line 2 of the form. The personal allowances worksheet
may be enough to make your head spin, but the other two will make
you tear your hair out.
The deductions and adjustments worksheet adds to the
number of allowances you can claim. Each $3,200 in expected deductions
and adjustments is worth one personal allowance. Rather than try
to guess at your 2005 deductions, use the amounts from your 2004
tax return. They are probably similar year to year. The other worksheet,
apparently developed by Al-Qaeda operatives working within the Internal
Revenue Service, is used to figure a flat amount to be withheld
from your pension based on your other income.
Since tax rates are percentages of income, I am not
sure why the IRS does not simply allow you to express the withholding
as a percentage of the pension payment. It can't be that they figure
we're too dumb to get the right percentage, but yet smart enough
to figure out the worksheets. It may be that they want retirees
to have something to do in retirement.
My recommendation to you, and a general rule, is to
enter the same number of allowances as on your employment W-4 and
see how much tax is being withheld (or ask the pension administrator
for this information). If the withholding is less than your marginal
tax rate, then I would use the difference as the flat amount to
be withheld from each payment.
Your marginal tax rate is the percentage of tax that
the next dollar you make will be taxed at, based on the 2005
tax rate schedules. It will be 15 percent, 25 percent, 28 percent,
33 percent or 35 percent. Figure out which percentage to use based
on your current expected taxable income before counting the pension
payment or based on your 2004 taxable income (Line
42) if it is expected to be the same.
For example, assume you claim zero allowances at work
and will receive $1,000 a month in pension-plan payments, you're
married and your 2004 taxable income without the pension was $140,000.
Based on the Circular
E table on page 52, your $1,000 monthly pension should have
$35 in federal income tax withheld. Based on the tax rate schedules
for 2005, your $140,000 in taxable income puts you in the 28 percent
bracket. So $280 in tax should be withheld. You should enter the
difference between $280 and $35 or $245 on line 3 of form W-4P.
With the time saved in completing Form W-4P, you should write your