In mid-April, 2009, retirees received from the Kentucky Retirement Systems a notice of a change in the federal income tax withholding tables. Though it may not have said why, it was a result of the new federal "Making Work Pay" stimulus tax credit on earned income.
Instead of giving this $400 MWP tax credit in one-time checks to working taxpayers, the Feds decided to give this $400 credit to workers by changing the federal withholding tables. Federal tax withholding was decreased, allowing an increase in the take-home pay on wages for each taxpayer.
KRS retirement benefits being automatically deposited to my account gave me an additional $66.70 per month, all because of this change in the withholding tables.
However, there is a serious problem! Retirement income doesn't count as "earned income" and retirees across the country were receiving some of their tax money back... which would have to be repaid when tax season arrives early next year!
In the rush to get this tax credit going, the present federal government haphazardly applied the same withholding tax tables to everybody that had federal taxes withheld. That included retirement systems across the country. This could create a dilemma for millions of taxpayers next tax season when retirees would rudely learn they would have to pay back their "Making Work Pay" stimulus credit.
The IRS admitted the error on May 14, 2009 and offered pension plans a way to fix the glitch that had been causing the new Making Work Pay tax credit to incorrectly boost pension payments to retirees. IRS allowed retirement systems to correct the problem by switching to an alternate withholding table.
The Kentucky Retirement Systems' Board of Directors met on or about May 21, 2009 and opted not to change back to the alternate withholding tables permitted by the IRS. They said it would be problematic and too expensive. Thus, retirees of KERS, CERS, and SPRS will continue to receive the extra MWP stimulus from the faulty withholding tables.
This may cause considerable tax problems for many retirees. As an example, the extra $600 I will be receiving the remainder of this year will have to be refunded at the next income tax report time early next year. If retirement income is not 'earned income', the MWP stimulus and any overpayment will have to be refunded.
There are several scenarios that can cause even greater problems. For instance, if my spouse was also a retiree of Kentucky Retirement System and was receiving an extra $600 because of the retirement system's continued use of the faulty withholding tables, that would double the amount of our payback!
Complicating matters again are situations where one or both retirees are still employed in some other capacity. Each worker is entitled to one $400 Making Work Pay tax credit, but the IRS will want back any overpayments.
Complicating matters again if you and or your spouse is/are a Social Security recipient... the $250 one-time Social Security stimulus check that was deposited to your account or sent to you may also enter into the picture, particularly if you work and have earned income. IRS rules prohibit any person keeping the $400 MWP tax credit and the $250 SS credit.
The maximum of all stimulus credits is set at $400 per person... which means IRS will want back any stimulus overpayments. The total stimulus allowed for a couple filing jointly is limited to $800. Similarly individuals making more than $95,000 and couples making more than $190,000 are ineligible for the credits.
If you are getting a sizable federal income tax refund each year, you may be OK. If your actual tax liability closely matches what you have withheld, you might consider increasing your withholding by the Kentucky Retirement Systems... however we are already at the midpoint for this year.
Some may have situations where pay-back can become rather steep. I don't know if these payments and overpayments can put you in a penalty bracket for underpayment of federal taxes. It is advisable to contact your tax preparer to resolve any questions about how these stimulus payments might affect you... and to determine any effect of underpayment of federal income taxes. Many retirees have already sent the retirement systems a new form to increase their federal withholding. Forms can be downloaded at this webpage for the Kentucky Retirement Systems: http://www.kyret.com/forms/forms.htm
ONE MORE POINT: When I began writing about this subject, my research indicated that the $400 Making Work Pay stimulus tax credit was for Year 2009. However, "this tax credit is temporary and will be in effect for the Years 2009 and 2010 only." (taxes.about.com)
The IRS website also says this: "In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act of 2009 will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly."
If the Kentucky Retirement Systems continues to stick with this faulty MWP withholding table for retirees in 2010, retirees need to also evaluate their tax situations for next year to avoid underpayment of taxes.
SOCIAL SECURITY & MEDICARE NEWS
Regarding Social Security annual cost of living increases: "President Obama's budget assumes no increase in 2010 or 2011, then a 1.4 percent increase in 2012." Quote is taken from New York Times news article of May 2, 2009... and has also been reported by other most other news sources. The same article provides the following information.
"A freeze in Social Security benefits would have major implications for Medicare because the COLA, in effect, puts a cap on premiums for Part B of Medicare, which covers doctors’ services.
If there is no cost-of-living adjustment for Social Security, about three-fourths of beneficiaries will not see any change in their basic Part B premiums, federal officials said. But some beneficiaries do not have this protection and could face substantial increases in their Part B premiums.
In addition, millions of beneficiaries could see higher premiums for drug coverage, provided under Part D of Medicare. Social Security and Medicare trustees will describe the outlook for benefits and premiums in their annual reports this month."
The Louisville Courier Journal, May 13, 2009, had this item: "Social Security and Medicare are fading even faster under the weight of the recession, heading for insolvency years sooner than previously expected, the government warned yesterday. Medicare already is paying out more money than it receives, something that happened for the first time last year. And Social Security will be by 2016, a year sooner than had been projected, the trustees' annual report said. Unless changes in Social Security are enacted, the retirement fund will be depleted in 2037, four years sooner than projected last year. The Medicare trust fund is in even worse shape. It is projected to become insolvent in 2017, two years earlier than expected."
....Ray Brittain, KPR Legislative Chairman
