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Federal Employees And Retirees Need To Check Federal Tax Withholding To Avoid Penalty Next Spring

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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.


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.

Posted with permission from: MyFederalRetirement.com

Federal Employees And Retirees Need To Check Federal Tax Withholding To Avoid Penalty Next Spring
« Previous Article Viewed 509 Times Next Article »