If you are receiving payments from a pension plan or an annuity, you must pay tax on this income. A convenient way to pay this tax is to have it deducted directly from your pension or annuity payment. Form W-4P is a federal income tax form used for this purpose.
Form W-4P Basics
Form W-4P must be completed by U.S. citizens, foreign nationals, or resident aliens, living in the U.S. or a representative of an estate for when pension or annuity income is received. The form is used to tell the holder of the pension or the annuity the amount of income tax to be withheld from each payment. The form must be signed and submitted to the payer of the pension or annuity each year. If no new form is submitted annually, the pension or annuity holder will rely on the information contained in the previous year’s form as being accurate until an updated form has been submitted.
If too much income tax is withheld from the pension or annuity payments, you will receive a refund. But you will have to pay tax when you file your return if too little money is withheld from the pension or annuity payments.
Types of Income Where Form W-4P Applies
Along with pensions and annuities, Form W-4P may also be used to specify federal income tax withholding for the following types of income:
- commercial annuities
- Individual Retirement Accounts (IRAs)
- stock bonuses
Income Tax Withholding Options
Pension or annuity income recipients have several options when completing Form W-4P. They can leave instructions to have:
- no income tax withheld, with some exceptions
- income tax withheld from taxable portion of payment
- extra income tax deducted from taxable portion of payment
Withholding varies, depending on the type of payment you receive. It also varies based on whether you are living outside of the U.S., if you are a nonresident alien or if the payment is being made to an out-of-country estate.
Withholding and Periodic Payments
Withholding from a pension or an annuity being paid out over more than one year – a periodic payment – is calculated in the same manner as withholding from wages paid to an employee. Periodic payments can be made to the recipient on a monthly, quarterly or annual basis.
Payments Delivered Outside of the U.S.
If no tax treaty is in effect, the usual rate for nonresident aliens and nonresident alien beneficiaries for withholding is 30 percent. Most tax treaties have provisions stating that private pensions and annuities are considered tax exempt. Payments from certain pension plans are tax exempt, even if no tax treaty is in effect.
How to Determine Withholding
The form is accompanied by a personal allowances worksheet. Complete it carefully to determine the number of withholding allowances you can claim when filing Form W-4P each year. Withholding allowances may be claimed for the following:
- Head of household filing status: If you are unmarried and paying more than half the costs of running a home for yourself and a qualifying person.
- Child tax credit: Credits may be available for children under age 17 as of December 31 who live with you for a minimum of half the year.
- Credit for other dependents: If you have dependent children over the age of 17, you may be able to claim a credit for them.
Other tax credits may apply to your situation, such as those for child care or education expenses. You may also be eligible to claim the earned income credit. If you claim these credits, the amount of the payment you receive will be larger, but it will be offset by a smaller refund when you file your taxes.