Federal Tax Changes Impacting Your Retirement Benefit

The American Recovery and Reinvestment Act of 2009 (also known as the stimulus package) contains provisions which change the amount of taxes withheld from your retirement benefits during the remainder of 2009 and all of 2010. These changes will also affect your 2009 and 2010 federal tax returns. Specifically, the two provisions of this package we want to bring to your attention are the Making Work Pay Credit and the Economic Recovery Payment.

Making Work Pay Credit

If you are employed, the Making Work Pay Credit is 6.2% of a taxpayer’s earned income with a maximum credit of $800 for a married couple filing a joint return and $400 for other taxpayers. It is phased out for taxpayers with an adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

The key words in this provision are “earned income.” While the IRS does not consider pension benefits earned income, they have nevertheless instructed retirement systems such as the Public School Retirement System (PSRS) to use the new federal withholding tables.

If you are no longer employed, you will not be entitled to the Making Work Pay Credit and may not have enough federal taxes withheld. To address this issue, you may want to adjust the amount withheld to a level that will more accurately reflect the amount of taxes you will likely owe.

If you are continuing to work during retirement, we recommend you contact your employer regarding your income. The amount of taxes withheld from your paycheck may change as a result of the new tax withholding tables.

Economic Recovery Payment

If you are receiving Social Security benefits, you will automatically receive a $250 payment from the Social Security Administration expected to be paid in May 2009. This is called the Economic Recovery Payment.

If you are receiving a PSRS benefit for non-Social Security covered service and not receiving a Social Security benefit you will be eligible for the $250 Economic Recovery Credit when you file your 2009 taxes.

If you have specific questions regarding these provisions, we recommend you consult your tax professional. If you wish to change your withholding, please complete a Tax Withholding Authorization form. Mail your completed form to the address listed on the form or fax it to (573) 634-7934. Forms received after the 20th of the month will be processed the following month.

Following are two examples to further explain the change.

Example 1

Brenda is a PSRS retiree collecting $36,000 a year in retirement. She does not qualify for Social Security so her PSRS benefit is her only income. Brenda is married and withholding federal taxes based on “married with zero” allowances.

So what tax credits will apply? Brenda qualifies for the $250 Economic Recovery Payment. She will receive this credit when she files her 2009 taxes.

How will the new tax tables impact her monthly checks? According to the new tables and her withholding status of “married with zero allowances” Brenda’s withholdings will decrease by $600 for the remainder of 2009. The new tables will provide Brenda with a $600 adjustment even though she will only qualify for the $250 Economic Recovery Credit.

What should she do? Brenda should talk with her tax professional and consider adjusting her tax withholdings so she does not end up owing taxes at the end of 2009.

Example 2

Mike is a PSRS retiree collecting a $25,000 a year retirement benefit in addition to a $5,000 a year Social Security benefit. Mike is not married and has elected a federal tax withholding based on “single with one allowance.”

So what tax credits will apply? Mike qualifies for the $250 Economic Recovery Payment. He will receive his check from Social Security. They are planning to mail the payments in May 2009.

How will the new tax tables impact his monthly checks? According to the new tables and his withholding status of “single with one allowance” Mike’s withholding from PSRS will decrease by $400 for the remainder of 2009. In addition, he will receive a $250 check from Social Security since he is currently receiving a Social Security benefit. Mike’s total reduced withholdings and Economic Recovery Payment add up to $650 even though he will only qualify for $250.

What should he do? Mike should talk to his tax professional and consider adjusting his tax withholdings so he does not end up owing taxes at the end of 2009.

Keep in mind, the employees of PSRS are not tax professionals and cannot give tax advice. I you have questions related to your specific situation, please contact your tax professional for guidance. You may also visit the IRS online at www.irs.gov for more information.

Twitter Facebook Login Site Map Search Home

	Federal Tax Changes Impacting Your PSRS Retirement Benefit The American Recovery and Reinvestment Act of 2009 (also known as the stimulus package) contains provisions which change the amount of taxes withheld from your retirement benefits during the remainder of 2009 and all of 2010. These changes will also affect your 2009 and 2010 federal tax returns. Specifically, the two provisions of this package we want to bring to your attention are the Making Work Pay Credit and the Economic Recovery Payment. Making Work Pay Credit If you are employed, the Making Work Pay Credit is 6.2% of a taxpayer’s earned income with a maximum credit of $800 for a married couple filing a joint return and $400 for other taxpayers. It is phased out for taxpayers with an adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly. The key words in this provision are “earned income.” While the IRS does not consider pension benefits earned income, they have nevertheless instructed retirement systems such as the Public School Retirement System (PSRS) to use the new federal withholding tables. If you are no longer employed, you will not be entitled to the Making Work Pay Credit and may not have enough federal taxes withheld. To address this issue, you may want to adjust the amount withheld to a level that will more accurately reflect the amount of taxes you will likely owe. If you are continuing to work during retirement, we recommend you contact your employer regarding your income. The amount of taxes withheld from your paycheck may change as a result of the new tax withholding tables. Economic Recovery Payment If you are receiving Social Security benefits, you will automatically receive a $250 payment from the Social Security Administration expected to be paid in May 2009. This is called the Economic Recovery Payment. If you are receiving a PSRS benefit for non-Social Security covered service and not receiving a Social Security benefit you will be eligible for the $250 Economic Recovery Credit when you file your 2009 taxes. If you have specific questions regarding these provisions, we recommend you consult your tax professional. If you wish to change your withholding, please complete a Tax Withholding Authorization form. Mail your completed form to the address listed on the form or fax it to (573) 634-7934. Forms received after the 20th of the month will be processed the following month. Following are two examples to further explain the change. Example 1 Brenda is a PSRS retiree collecting $36,000 a year in retirement. She does not qualify for Social Security so her PSRS benefit is her only income. Brenda is married and withholding federal taxes based on “married with zero” allowances. So what tax credits will apply? Brenda qualifies for the $250 Economic Recovery Payment. She will receive this credit when she files her 2009 taxes. How will the new tax tables impact her monthly checks? According to the new tables and her withholding status of “married with zero allowances” Brenda’s withholdings will decrease by $600 for the remainder of 2009. The new tables will provide Brenda with a $600 adjustment even though she will only qualify for the $250 Economic Recovery Credit. What should she do? Brenda should talk with her tax professional and consider adjusting her tax withholdings so she does not end up owing taxes at the end of 2009. Example 2 Mike is a PSRS retiree collecting a $25,000 a year retirement benefit in addition to a $5,000 a year Social Security benefit. Mike is not married and has elected a federal tax withholding based on “single with one allowance.” So what tax credits will apply? Mike qualifies for the $250 Economic Recovery Payment. He will receive his check from Social Security. They are planning to mail the payments in May 2009. How will the new tax tables impact his monthly checks? According to the new tables and his withholding status of “single with one allowance” Mike’s withholding from PSRS will decrease by $400 for the remainder of 2009. In addition, he will receive a $250 check from Social Security since he is currently receiving a Social Security benefit. Mike’s total reduced withholdings and Economic Recovery Payment add up to $650 even though he will only qualify for $250. What should he do? Mike should talk to his tax professional and consider adjusting his tax withholdings so he does not end up owing taxes at the end of 2009. Keep in mind, the employees of PSRS are not tax professionals and cannot give tax advice. I you have questions related to your specific situation, please contact your tax professional for guidance. You may also visit the IRS online at www.irs.gov for more information.