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Federal Employees and Retirees Need to Check Federal Tax Withholding To Avoid Penalty Next Spring
Edward A. Zurndorfer, CFP
The Making Work Pay Credit (MWPC) was enacted as part of the American Recovery
and Reinvestment Act of 2009 (ARRA) which was signed into law on Feb. 17, 2009.
The maximum credit is $400 for single taxpayers and $800 for married taxpayers
filing jointly. The credit will be available for 2009 and 2010.
In many ways the MWPC is similar to the Economic Recovery Payment (ERP) which .
was enacted in the Economic Stimulus Act for the 2008 tax year. Both the MWPC
and the ERP are calculated based on earned income and both are phased out above
a modified adjusted gross income (MAGI) of $75,000 for singles and $150,000 for
married filing jointly. Both the ARRA and the economic stimulus act were
designed to put more money in the public's pocket in order to turn around the
depressed economy and to help consumers start spending.
The following table summarizes some differences between the two
provision.
|
|
Making Work Pay Credit |
Economic Recovery Payment |
|
Effective Date |
Tax years 2009 and 2010 |
2008 |
|
Amount of Credit |
Lesser of 6.2% of earned income or $400 single, $800 MFJ; no additional
credit for children |
$600 for single
$1,200 for MFJ, maximum
$300 per child |
|
Eligible Recipients |
Taxpayers with earned income |
Taxpayers with earned income and retired Americans |
|
Mode of Disbursement |
Change in withholding tables |
Lump sum payment by check |
|
Ineligible Individuals |
Nonresident aliens Dependent on another's tax return
Estates and trusts |
Same as MWPC |
As shown in the above table, several differences exist between the two
provisions including: (1) the credit amount; (2) the individuals eligible for
the credit; and (3) the mode of delivery of the credit.
Most working individuals -- including federal employees -- started receiving
the MWPC beginning in April and May of 2009 through small increases in their
paychecks. These increases were a result of adjusted income tax withholding
tables issued by the IRS. But as will be discussed below, the revised tables
could cause a tax problem among some employees.
The problem is that the revised withholding tables may reduce withholding too
much in certain situations. For example, the revised withholding tables do not
take into account other sources of an employee's income in the calculation of
MAGI that may take an employee's MAGI into and beyond the phase-out range of the
MWPC. For example, employees with large amounts of investment income - that
includes interest, dividend and capital gain income - may discover that
too little in federal income taxes were withheld during 2009. Many of these
employees could owe a significant amount of federal income taxes when they file
their 2009 income taxes next spring.
Individuals most at-risk for reduced federal income tax withholding and a
possible problem in spring 2010 when 2009 federal income taxes are filed
include:
- Married couples in which both spouses work;
- Individuals with more than one job;
- Retirees - including federal annuitants - who have federal income tax
withheld from their pensions
- Social Security recipients who are also working; and
- Individuals with large amounts of investment income.
For many individuals, the new IRS tax tables will result in
smaller-than-expected refunds next spring. Those individuals who calculate their
withholding in order to receive a small refund or who owe a small balance could
face an unwelcomed tax bill come next spring.
Federal employees should check their federal income tax withholding at this
time to make sure sufficient taxes are being taken out of their salaries.
Married employees in which both spouses are working should each check their
federal tax withholding.
The following examples help illustrate the problem:
- A married couple with a combined income of $60,000 is eligible for an $800
MWPC. But if both spouses are working and each spouse is earning more than
$13,000, the new withholding tables give each spouse $600 less withholding for a
total decrease in withholding of $1,200. This means that when the couple files
their 2009 income taxes, they will owe at least $1,200 less $800, or $400 more
in federal income taxes.
- A single college student working over the summer earns $10,000. That results
in a $400 tax credit. However, since the student is claimed as a dependent on a
parent's tax return, the college student does not qualify for the credit and
will have to repay the $400 credit when the student files next
spring.
Federal annuitants who have federal income taxes withheld from their CSRS and
FERS annuity checks are also noticing less federal tax withholding as a result
of the new withholding tables. But pension income is not considered earned
income. Therefore, federal annuitants do not qualify for the tax credit. The
decrease in withholding will have to be made up when the annuitant files his or
her taxes next spring.
The Social Security Administration is sending $250 payments to more than 500
million retirees in May and June as part of the economic stimulus package. The
payments will go to Social Security, Supplemental Security Income, Railroad
Retirement Benefits or Veteran's Disability Benefits. More than 20 million
retirees and survivors receive payments from defined benefit pension plans. Many
of these pensioners have federal taxes withheld from their pension checks and
may owe federal taxes next spring.
It is important for federal employees and annuitants to check the reduced
withholding in their salaries or their pensions at this time. If too little in
federal income taxes are being withheld, they should request a change on their
W4 for the remainder of 2009 and for 2010. Federal estimated tax payments due
September 15 and June 15 may also have to be filed.
The IRS has been asked to address the problem of the effect of the tax credit
on pension payments. Until the IRS comes up with a solution, dependent taxpayers
and retirees in particular will need to double check their current withholding
and take the necessary actions to make sure they are not underwithheld in
federal income taxes and if so, take the necessary actions to correct the
underwithholding.
Tax and Legal Advice Disclaimer: Please note that
Multi-Financial Securities Corporation nor any of its agents or representatives
give legal or tax advice. For complete details, readers should consult with
their tax advisor or attorney.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in
Silver Spring, Maryland. He is also a registered representative with
Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also
located in Silver Spring, Maryland.
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