Tax quirk may cost retirees

The stimulus tax benefit might mean higher taxes for pensioners next April 15.

COLUMBUS DISPATCH

Americans are getting more money in their paychecks and pension payments thanks to a tax change in the federal stimulus package, but retirees beware: A little-publicized quirk could lead to a nasty surprise at tax time next year.

That’s because although federal tax withholding is being reduced for everyone because of a tax credit in the stimulus bill, pension payments are not eligible for the credit, meaning retirees could face an unintended tax liability as a result.

Some lawmakers, unions and pension systems are complaining to the IRS about the problem while scrambling to notify their members about it.

“It’s a really awkward situation, and it’s confusing, at best, for retirees,” said Leigh Snell of the National Council on Teacher Retirement. “I am concerned that come next April, some retirees are in for a rude surprise.”

The federal stimulus bill passed earlier this year included a “Making Work Pay” tax credit of up to $400 for working individuals and up to $800 for married taxpayers.

Typically, the credit is being provided by having employers reduce the amount of federal income tax withheld from workers’ paychecks starting April 1 or earlier, leading to slightly more take-home pay from each check.

The idea is to put more money in people’s pockets a little bit at a time so they’ll spend it and boost the economy, instead of giving them a single check that they might be inclined to save or use to pay bills.

But public and private pension recipients do not qualify for the credit unless they have other earned income from an employer. And even if retirees don’t qualify, the IRS has ordered that their withholding amounts must be changed.

That means retirees are having less tax withheld than they will be responsible for paying when they file their taxes in 2010. It could mean a lower refund amount or a larger tax bill, depending on the individual’s circumstances.

Although pension payments are not eligible for the credit, those receiving Social Security will get a one-time, $250 payment by late May. Government retirees who are not part of Social Security will get a refundable $250 tax credit.

Retirees are being advised to check with their pension-plan administrator or a tax adviser to ensure that the proper amount of taxes is being withheld from their pension checks. It could mean having to file a new W-4 withholding tax form.

“It’s up to the taxpayer to make the changes,” said Gil Charney, a tax analyst with H&R Block.

Unions and pension systems in Ohio are sending notices about the problem with pension checks, and they plan to include articles about the issue in their upcoming newsletters.

So why did the IRS require that less money be withheld from pension checks, even though retirees don’t qualify for the credit?

Eric Erickson, an IRS spokesman, said the IRS adopted a single set of withholding tables because taxpayers have different circumstances, and having separate charts for every circumstance could be “impractical.”

That doesn’t satisfy some critics who complain that the government is causing unnecessary headaches for retirees. One suggestion has been to have the IRS allow pension plans to use the old withholding tables.

‘“We’re hoping to get it fixed so that [retirees] won’t have to deal with this at tax time,” said Tiberi spokeswoman Breann Gonzalez.