Taxability of Continuing Allowances
Under most circumstances, continuing allowances are taxable. However, if a safety member was killed in the line of duty, the continuing allowance may not be taxable under IRS Code.
For specifics on your personal situation, consult with a professional advisor. LACERA does not offer tax or legal advice.
You may elect to have federal or California state tax withheld from your continuing allowance at whatever rate you choose or you may elect not to have withholding deducted. (California income tax is not withheld from your retirement allowance if you reside outside of California.) You may designate your tax withholding elections on tax form W-4P/DE-4P.
The quickest and easiest way to adjust and submit your tax withholding election is on My LACERA, once you have a set up a survivor account. Or you can print Form W-4P/DE-4P, complete and sign it, and mail it to LACERA. Your new tax withholding will be reflected on the check that is issued at least 30 days after we receive your form.
Without a completed tax form W-4P/DE-4P on file, LACERA is required by law to withhold taxes from your allowance as if you were a married person claiming three withholding exemptions.
Each January, LACERA will send you a copy of the Form 1099-R it submits to the IRS. The form indicates the taxable amount of the benefit paid to you in the previous year.
Taxability of Lump-Sum Payments
Most lump-sum death benefits are taxable. However, if a safety member was killed in the line of duty, the lump-sum payment may not be taxable under IRS Code.
Federal law requires LACERA to withhold 20 percent of a lump-sum payment in federal income tax, and an additional 2 percent in state tax if the recipient resides in California.
In most cases, the benefit is also eligible for a tax-deferred rollover to a traditional IRA or eligible employer plan if the recipient is under age 72. Individuals who reach age 72 on or before December 31 in the year the benefit is disbursed are not eligible to roll over. In certain cases, a portion of the benefit may not be taxable; LACERA will notify you of the taxable portion. California residents are subject to state income tax on the benefit.
Information on the taxability of payments from qualified employer plans (such as LACERA’s) is available in the following publications, available through the links provided below, your local IRS office, or by calling 800-TAX-FORMS.
- IRS Publication 575: Pension and Annuity Income
- IRS Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)
- IRS Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)
In January, LACERA will send you a copy of the Form 1099-R it submits to the IRS. The form indicates the taxable amount of the benefit paid to you in the previous year.