 |
 |
 |
 |
 |
 |
 |
|
 |
 |
 |
 |
Taxation of your benefit
Taxes and your retirement allowance
IMPORTANT NOTE: The MTRS is not qualified to provide specific advice relative to the federal tax code. You should consult your personal accountant and/or obtain a copy of IRS Publication 575, Pension and Annuity Income, to ensure that you are in compliance with all of the appropriate federal requirements.
Taxes and your retirement allowance
The superannuation retirement allowance that you receive from the MTRS is exempt from taxation under the Massachusetts income tax laws. The federal government (IRS), however, will tax a large portion of your retirement allowance immediately upon retirement. Approximately 95-98% will be taxable at the federal level. (If you move to another state after retirement, your allowance may be subject to that state’s income taxes. It is advisable to check with the other state’s department of revenue for further information. For guidance on how other states treat your MTRS pension, see the Massachusetts Department of Revenue’s site.)
Upon your retirement, you will be required to complete a W–4P Form to begin a monthly federal tax withholding. It is very important that you complete a tax withholding form in conjunction with your retirement. If no form is filed with your retirement board, the retirement board is required by federal law to withhold taxes, starting with your second retirement check, as if you were a married person with three exemptions. It is also possible to request that no taxes be withheld. However, if no taxes are withheld, you should submit estimated quarterly payments to the IRS. You may change your federal tax withholding amount at any time during your retirement simply by notifying us.
Your tax liability will be determined by using the Internal Revenue Service’s Simplified Method. The tax-free portion depends on the amount of your after-tax contributions to the retirement system, when your contributions were made, and your life expectancy at the time of your retirement.
Since January of 1988, all contributions to the retirement system are being made on a pre-tax basis. Consequently, only your contributions made prior to January of 1988 and any purchases of creditable service made with after-tax dollars will be eligible for exclusion from your federal taxes. Pre-tax contributions and all of the interest which your account has earned cannot be used when you figure the yearly tax-exempt portion of your retirement allowance.
To determine your federal tax liability of your retirement allowance in your first year of retirement, review and complete the following sample worksheet. The example illustrates the calculations for a retiree who is 59 on her retirement date of June 30 and who receives an annual retirement allowance of $30,000.
Please be aware that this worksheet is adapted from the IRS version and applies only to your federal tax liability on your MTRS retirement allowance in the first calendar year of retirement. It does NOT account for any other pension or annuity plans you may have and it does NOT address your potential tax liability after this first year. For additional information, contact the IRS, refer to IRS Publication 575 or discuss this with your accountant or tax advisor.
Sample worksheet: This is not an interactive worksheet that you can fill in on screen. Accordingly, you may want to print this page and complete the worksheet on paper.
| Line |
|
|
|
| 1 | Enter the total retirement allowance amount that you will actually receive this year. (In the example, the retiree received her allowance for July 1 through December 31, or for 6 of 12 months, which equalled $15,000 for the period.) | $15,000.00 | |
| 2 | Enter the total amount of your after-tax contributions to your annuity savings account. This amount is equal to your total contributions prior to January 1, 1988, plus any after-tax service purchases you made after January 1, 1988, and is listed on your Notice of Estimated Benefit (Estimated After-Tax Contributions) that we send you prior to your retirement. | $21,000.00 | |
| 3 | If you are an Option A or B retiree and your age on your date of retirement (and your date of retirement is after 11/7/96) is:
If you are an Option C retiree and the combined ages of you and your beneficiary on your date of retirement are:
|
310 | |
| 4 | Divide Line 2 by Line 3 and enter the result | $67.74 | |
| 5 | Enter the number of months for which you will receive retirement allowance payments this year | 6 | |
| 6 | Multiply Line 4 by Line 5 and enter the result | $406.44 | |
| 7 | Subtract Line 6 from Line 1 and enter the result. This is your taxable amount. | $14,593.56 |
To determine the annual amount to be excluded from your pension income in the following year, take the amount from Line 4 and multiply by 12.