Investments Excluded From Withholding
Various investment accounts that are set aside for retirement, education and long-term savings such as bank certificates of deposit, stocks, bonds and mutual funds or other investments like real estate or life insurance are typical investments that taxpayers consider when establishing an investment portfolio.
Most stocks, bonds and mutual funds (as well as bank certificates of deposit) may be subject to backup withholding taxes, not all investment income payees are required to withhold taxes. This includes cases where a shareholder has not filed a W9 form. Some of these include:
Income from long-term care benefits - Investors who have earned interest or dividends on long-term care plans are not subject to having part of their benefits withheld for tax purposes. While this income may still need to be claimed, the investor will receive this amount in full.
Income on qualified retirement plans - Company sponsored benefit plans such as Employee Stock Ownership Plans (ESOPs) are not subject to withholding. Earnings will need to be claimed on the shareholders tax forms but they are not subject to having taxes withheld at the time of distribution.
Income tax refunds - Income tax refunds on both the state and federal level are free from backup withholding requirements. These funds must be paid to the taxpayer even if their social security number is not verified using a Form W9. Taxpayers may face other levies on their refunds but this is not one that they will have to be concerned about.
Other income that is not subject to backup withholding includes (but is not limited to) unemployment compensation, real estate transactions and canceled debts. Investors who believe they may be subject to backup withholding taxes should contact the Internal Revenue Service for additional information. Losing 28 percent of investment income on each distribution can be very costly for those with a significant investment portfolio. In most cases, filing a W9 form will help an investor keep more of their earnings.