Ever since World War II, the federal government has required taxpayers to pay their taxes throughout the year rather than in one lump sum at tax time. Pension and annuity income is no different. However, not all taxpayers owe the same amounts, so the company paying the money needs more information to determine how much to withhold, and that's where the Form W-4P comes in.
When you're an employee, your employer takes care of your estimated tax payment requirement by withholding money from your paycheck based on your W-4. When you're receiving income from pensions, annuities, commercial annuities and other deferred compensation, you need to file a W-4P to determine how much to withhold to cover your impending tax bill. Based on the information you provide, the institution paying you will withhold money for your federal income taxes.
If you don't have enough withheld from your income during the year, you could find yourself owing the Internal Revenue Service extra in interest and penalties when you file your tax return at the end of the year. For example, you can elect not to have any money withheld from your pension payments at all. However, if you're not making other estimated tax payments throughout the year to make up for the money that should be withheld, you'll get hit with an underpayment penalty.
When you turn in your W-4P, all the financial institution gets is your name, address, Social Security number, filing status, number of allowances you are claiming and any additional amounts you want withheld. To figure out how many allowances to claim, you need to complete a Personal Allowances Worksheet. This determines your personal allowances based on, among other things, your filing status, how many pensions you're receiving and how many dependents you have. If you have multiple pensions or other sources of income, you should also fill out the Multiple Pensions/More-Than-One-Income Worksheet. If you're planning on claiming significant tax deductions or credits, also complete the Deductions and Adjustments Worksheet.
Changing Your W-4P
Once you file your W-4P, it stays in effect until you submit a new one. However, you can submit a new W-4P whenever you want as your life circumstances change. For example, if you retire completely so your pension is your only source of income, you might be able to claim an additional allowance. But, if your dependent son finally leaves the nest and you can't claim him any more, you need to file a new W-4P to reflect one less allowance.
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