This ensures that there is no over-withholding.

2. According to Stanton, the penalty for deliberately underwithholding by more than $500 nets a penalty of up to 25 percent of what should have been withheld, plus interest. Another way to stay safe is withhold at least as much tax as you paid last year, adds Boggs, the CPA.

This is designed as incentive for over-withholding.

The broader issue, of course, is:
The new pension tax is expected to generate more than $300million for the state coffers in 2013, to make up the shortfall caused by a cut in the state business tax that will save corporations $1.7 billion this year. AARP of Michigan estimates that 380,000 households in the state will see some or all pension income taxed for 2012.