By Corky Cootes
Starting this year, the IRS requires holders to deduct the 10% federal tax from traditional IRAs prior to unclaimed property reporting. NAUPA recommends using the TW “Income Tax Withheld” standard deduction code in this case. The value of the property before the deduction should be put in the PROP-AMOUNT-REPORTED field, and the amount after the 10% deduction goes in PROP-AMOUNT-REMITTED.
The majority of states I have contacted have confirmed that they are following the NAUPA guidance, but I have run into a few exceptions, notably Colorado, which currently does not support the use of TW. Colorado asks that holders report and remit the post-deduction amount, without mentioning the federal tax withholding at all. We also have discovered that Mississippi’s system does not recognize TW, and instead requests that the SW deduction code be used instead.
Our software will be updated to create the NAUPA file according to the individual state requirements as more information comes in.
On January 1, 2020, The Internal Revenue Service’s Revenue Ruling 2018-17 will go into effect concerning withholding and reporting taxes with respect to payments from Individual Retirement Accounts (“IRAs”) to state unclaimed property programs. Holders reporting these properties should make use of the NAUPA Standard Deduction and Withholding code “TW” to represent “Income Tax Withheld.” The value “TW” should be recorded in the PROPERTY record in the PROP-DEDUCTION-TYPE field. The amount of Federal Tax Withheld should be stored in the PROP-DEDUCTION AMOUNT field. This code should be used for any taxes withheld from remitted properties. The value of the property before the deduction should be stored in the PROP-AMOUNT-REPORTED field. The amount remitted to the state after the Federal Tax Withholding should be stored in the PROP-AMOUNT-REMITTED field. It is imperative that all withheld taxes are reflected in reports of unclaimed property, so that the claimants may be so advised and address this in conjunction with their tax reporting. In the event of multiple deductions, the Tax Withholding code should take priority. Since only one deduction field is available, the state and federal withholdings should be totaled for inclusion. We hope that holders would consider providing additional information to the states for the detail of the deductions. For more information related to the NAUPA reporting standard, please visit this page. Companies who withhold taxes should report and remit those taxes to the Internal Revenue Service or other taxing agency. Contact your legal or tax advisor for reporting and remittance instructions. For more information on the Revenue Ruling 2018-17, visit this page.