Tax Type
Employer Income Tax Withholding
Individual Income Tax
Description
Wages, Individual Retirement Plans and Simplified Employee Pension Plans
Topic
Withholding of Tax
Date Issued
04-21-1992
April 21, 1992
Dear*****************
This is in response to the many questions the Department of Taxation has received regarding the recent legislation exempting financial institutions from certain withholding requirements (1992 Acts, Chapter 519).
Effective for taxable years beginning on and after January 1, 1992, benefits received from individual retirement plans (IRA's) and simplified employee pension plans (SEP's) are exempted from Virginia income tax withholding requirements. In addition, a financial institution, corporation, partnership or other person acting as custodian, trustee or depository for an individual retirement plan or simplified employee pension plan is exempted from the Virginia income tax withholding requirements imposed on other payers of pensions.
The effect of this legislation is to deconform Virginia from federal withholding requirements by exempting benefits received from IRA's and SEP's from Virginia income tax withholding, even though such benefits are subject to federal withholding. Because this change is retroactive to January 1, 1992, many financial institutions have requested guidance regarding what to do when Virginia tax has been withheld on such benefits.
A financial institution, corporation, partnership or other person acting as custodian, trustee or depository for an IRA or SEP who has withheld Virginia income tax on IRA or SEP benefits may refund the amount of tax withheld to the recipient of the IRA or SEP benefits. The institution may then claim a credit for the amount of tax refunded on subsequent withholding returns. If the institution is unable to recover the tax refunded to the recipient through credits, the institution may apply to the department for a refund.
Because benefits received from an IRA or SEP remain taxable, even though now exempt from withholding, the recipient who receives such a refund of taxes withheld should be notified of the Virginia estimated tax requirements. Failure to pay sufficient taxes through estimated payments and/or withholding taxes may result in a penalty assessment for the failure to pay estimated taxes. Taxes refunded to the recipient by the institution should not be reported on Form 1099 at year end.
A second option is to remit to the department all taxes already withheld From IRA or SEP benefits and to issue the recipient a Form 1099 at the year end showing the amount of Virginia tax withheld. The recipient then can report the withholding on his Virginia income tax return and claim the withholding as a credit against the tax due for taxable year 1992
While under the new law withholding is no longer mandatory, there is nothing that would prohibit voluntary withholding at the request of the recipient. Therefore, a third option is to offer voluntary withholding to recipients of IRA or SEP benefits. This would generally relieve the recipient of the burden of making estimated tax payments.
The department is making this information available to you in the hope that your organization can disseminate it to your member banks. In addition, the department is including notice of this law change in its various publications detailing the 1992 legislation that impacts state taxes.
If you or any of your member institutions have any questions, please contact the department at (804) 367-8038.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner