Chapter 26Tax Withholdings

Withholding taxes gives the Government part of your income before you have a chance to use it. Withholding tax is imposed on salary and wage income, tip income, certain gambling winnings, pensions, and retirement distributions, but you may avoid withholding on retirement payments (26.10). Withholding is also imposed on interest and dividends if you do not give your taxpayer identification number to a payer of interest or dividend income.

You may increase or decrease withholdings on your wages by submitting a new Form W-4 to your employer. Withholdings may be reduced by claiming allowances based on tax deductions and credits.

Make sure that tax withholdings meet or help you meet the estimated tax rules that require withholdings plus estimated tax payments to equal 90% of your current year liability or the required percentage of the prior year’s liability; see Chapter 27.

A mandatory 20% withholding rate applies to eligible rollover distributions that are paid to you from an employer retirement plan. You may avoid the withholding by instructing your employer to directly transfer the funds to an IRA or the plan of a new employer (26.10).

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