IRS proposes new rules for retirement and annuity payments

The Internal Revenue Service and the Treasury Department issued proposed regulations Wednesday to update the income tax withholding rules for periodic retirement and annuity payments made after Dec. 31, 2020.

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

The TCJA changed that rule so the rate of withholding on periodic payments when no withholding certificate is in effect would instead be determined under rules prescribed by the Treasury.

Earlier this year, in Notice 2020-3, the IRS said 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. But now, under the proposed regulation issued Wednesday for 2021 and future years, the Treasury and the IRS will be providing 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.

The Treasury and the IRS have issued several sets of regulations over the years going back to at least 1982 to provide guidance regarding withholding on periodic payments, non-periodic distributions and eligible rollover distributions under section 3405 of the Tax Code. This appears to be the latest iteration, and probably not the last as most of the individual tax provisions of the TCJA are set to expire in 2025.

Andrew Harrer/Bloomberg