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Question about federal tax withholding for pensions in the US.

I've decided to dig into a pension and they require me to fill out a form W4P for federal tax withholding. Our other income is from multiple sources and it's very "lumpy" and hard to predict over a one year time frame: I haven't the faintest idea how to answer the income question with any level of fidelity.

Currently I only pay quarterly estimated taxes, have no withholdings, and I reconcile all of that at the end of the year.

I can randomly make a number to put in the W4P but, chances are, it's going to be off by a factor of 2 or 3 by the end of the year.

Question

  1. As long as I pay estimated taxes without underpaying: does it actually matter what's in the W4P ?
  2. What happens if I just set the extra income in the W4P to zero (even if its not)?
  3. Are there any negative consequences to have a "wrong" W4P other than a potential underpayment penalty?
  4. Can I just chose not to have any taxes withheld and handle all of this through my quarterly estimated payments ?
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  • 1
    W4P is ... a W4. How about this question, does it sound similar enough to yours? money.stackexchange.com/questions/105285/…
    – littleadv
    Dec 10, 2023 at 17:14
  • @littleadv: not really. My question is more about: "If I do quarterly tax payments anyway, can I just put 'don't withhold" or wrong numbers on my W4P". I don't want to deal with two different tax payment methods. Are they any penalties for an incorrect W4P if the there is no underpayment ?
    – Hilmar
    Dec 11, 2023 at 7:42

1 Answer 1

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The IRS doesn't care how you pay your taxes, as long as you pay them.

However...

As long as I pay estimated taxes without underpaying: does it actually matter what's in the W4P ?

Not really. However, with estimated payments you need to follow your income, if your non-pension income is not spread evenly throughout the year you may end up with underpayment penalty even if your total estimates cover your total taxes. That's not an issue with withholding.

Generally, paying taxes through withholding is safer, penatly-wise, than with estimated payments.

What happens if I just set the extra income in the W4P to zero (even if its not)?

If you end up with underpayment you may be subject to penalty.

Are there any negative consequences to have a "wrong" W4P other than a potential underpayment penalty?

In extreme situations you may be hit with backup withholding, but that's probably not a risk if you intend to cover your taxes with estimated payments.

Can I just chose not to have any taxes withheld and handle all of this through my quarterly estimated payments ?

No, there's no such option.

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  • You can "cheat" the W4 numbers to increase withholding; I used to do that so enough was taken to cover my expected investment income as well as my salary. You can't decrease it past the base amount except by decreasing your salary income
    – keshlam
    Dec 11, 2023 at 14:39
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    @keshlam that's not "cheating", that's exactly what it's for
    – littleadv
    Dec 11, 2023 at 17:17
  • Well, sort of. To get the withholding I wanted, I needed to claim bogus dependents. That's OK, nobody really cares as long as you're withholding a reasonable amount, but it would have been better better if I could have just said "Take additional withholding of $X" directly. Which, to my memory, was not an option at the time.
    – keshlam
    Dec 11, 2023 at 20:56
  • There is an option for no withholding, as long as you live in the US, although since 2022 there is no longer a checkbox for it (on the standard form); see the fourth paragraph under General Instructions. This contrasts to W4 for payroll where you get this option only if you had no tax liability the prior year and expect none the current year, a much stricter/rarer condition. Dec 13, 2023 at 5:34

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