This information applies to survivors and beneficiaries who are U.S. citizens or resident aliens (green card holders) and live in the United States.
Taxability of Continuing Allowances
Under most circumstances, continuing allowances are taxable under both federal and State of California tax laws.
For survivors of safety members killed in the line of duty, the continuing allowance may not be taxable under IRS Code.
Information on the taxability of payments from qualified employer plans (such as LACERA’s) is available in the publication linked below, your local IRS office, or by calling 800-TAX-FORMS.
Payment of your income tax is your responsibility. Withholding is one way for you to pay a portion of your tax. If no tax or not enough tax is withheld from your benefits, you may have to pay estimated taxes during the year or pay a tax penalty at the end of the year. For specifics on your personal situation, consult with a professional advisor. LACERA does not offer tax or legal advice.
Federal Tax Withholding
LACERA must withhold federal taxes from your monthly continuing allowance at no less than the applicable default rate if you do not submit a W-4P form or if your W-4P form does not indicate your election to have no federal withholding. The current default federal withholding rate is based on if you were single and claiming no adjustments.
State Tax Withholding: California Residents
LACERA must withhold California state taxes from your monthly continuing allowance at no less than the applicable default rate if you are a California resident and do not submit a DE 4P form indicating your election to have no California state withholding. The current default California state withholding rate is based on if you were married and claiming three withholding allowances.
State Tax Withholding: Non-California Residents
Your LACERA survivor income may be taxable in your state; state tax requirements differ. However, the source tax law protects you from paying state taxes in two states on the same retirement income.
In compliance with federal law, California income tax is not withheld if your primary residence is outside California. If you are receiving other income from California, you may still be subject to state tax. You may not elect to have LACERA withhold taxes from your allowance to satisfy your other California obligations if you do not reside in California.
Information on the taxability of payments from qualified employer plans such as LACERA’s is available in the publication linked below, your local IRS office, or by calling 800-TAX-FORMS.
Changing Your Tax Withholding
You have the option to change your tax withholding election at any time. For more information, visit the Changing Your Tax Withholding page.
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.
For lump-sum payments, LACERA must generally withhold 20 percent in federal income tax and an additional two percent in state tax if the recipient resides in California and does not elect to have no state tax withheld. In certain cases, a portion of the benefit may not be taxable; LACERA will notify you of the taxable portion.
In most cases, taxable lump-sum payments are eligible for a tax-deferred rollover to a traditional Individual Retirement Account (IRA) or eligible employer plan. (A rollover is a payment by you or LACERA of your lump-sum Benefit Payment to an IRA or other plan that allows you to postpone taxation of that benefit until it is paid to you.) However, make sure your IRA or eligible employer plan will accept a rollover from LACERA. Please note that lump-sum payments representing monthly benefit amounts that were not paid to the decedent or the decedent’s beneficiaries are generally not eligible for rollover.
If IRS required minimum distributions (RMDs) apply to a lump-sum death benefit you are receiving, you will not be eligible to roll over the RMD portion of the payment. Federal regulations require LACERA to exclude RMDs from the rollover amount and issue the RMDs in a separate check payable to you rather than your IRA or eligible employer plan.
- For more information on rollovers, see this Special Tax Notice
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 and the amount of taxes withheld. Copies of your 1099-R are also available on My LACERA.
Information on the taxability of payments from qualified employer plans (such as LACERA’s) is available in the publications linked below, your local IRS office, or by calling 800-TAX-FORMS.