Editor’s note: Updated forms are now available online at copera.org.

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The IRS is implementing some changes to tax withholding forms in 2023 that could affect retirees who receive benefit payments from plans like Colorado PERA.

Background

In 2020, the IRS began requiring employers to use a new version of Form W-4, which employees fill out to tell their employer how much to withhold from their paychecks. The updated form was a result of the Tax Cuts and Jobs Act of 2017, which made a number of significant changes to tax law, including eliminating personal exemptions. Instead of using complicated worksheets and declaring a number of withholding allowances, employees now fill out the form with the relevant information, and employers calculate the appropriate amount of tax to withhold.

The updated form is intended to ensure employers withhold a more accurate amount from workers’ paychecks. The result is fewer people who either owe money to the IRS or who receive large refunds at tax time.

Updated W-4P and new W-4R

Following the tax code changes from the Tax Cuts and Jobs Act and the updated W-4 form, the IRS is also updating Form W-4P, which is used to determine tax withholdings for pension and annuity accounts.

While the old form covered both one-time distributions and recurring payments, there are now two forms. Form W-4P is only for recurring payments such as monthly PERA benefit payments, while Form W-4R is for one-time or lump-sum distributions such as refunds or rollovers.

Like the W-4, the W-4P form no longer allows tax filers to adjust their withholdings by electing a specific number of withholding allowances. Instead, the W-4P form has new input fields for increasing or decreasing the amount to withhold, including fields for tax credits and deductions.

What the changes mean for PERA retirees

PERA retirees and benefit recipients who are currently receiving ongoing PERA benefit payments and who do not wish to make changes to their federal tax withholding elections are not required to file a new form. However, PERA recommends completing a new W-4P form for 2023 to ensure the appropriate tax amount is withheld. 

If a filer makes no changes to their federal tax withholding elections, PERA will use the IRS method to bridge their tax table elections over to the new methodology as of January 1, 2023. This bridging, in most cases, will adjust their withholding accordingly. If a person’s current election is to withhold zero federal tax, a flat dollar amount tax or flat percentage tax, those elections will remain the same, but may be incorrect withholding amounts under the new IRS guidelines, which is why PERA recommends submitting the new W-4P form for 2023.

PERA anticipates retirees and benefit recipients will be able to update their tax withholding elections online and by paper forms in mid-December 2022 for changes to take effect January 1, 2023.

Please note that PERA cannot provide tax advice, including advice about how to complete these forms. If you have questions about your particular situation, please contact a tax or legal advisor.

For more information on taxes and PERA benefits, visit copera.org.