Q: My federal income tax withheld for February 2011 increased by $45.28. It increased from $349.80 to $395.08. I did not request this change. Is there reason for this retiree federal income increase? I understand that I am not the only retiree affected by this change.
A: According to NARFE, the National Association of Active and Retired Federal Employees, “While all of the attention recently was on Congress extending the Bush-era tax cuts — which happened — a lesser-known federal tax credit for employees and retirees that was part of the 2009 Stimulus law was allowed to expire.
“The ‘Making Work Pay’ credit expired Dec. 31, 2010, which could mean higher federal tax withholding amounts in monthly annuities/pensions for public and private sector retirees, including federal annuitants. The Internal Revenue Service issued a notice in December saying withholding tables for 2011 would no longer be adjusted for the Making Work Pay tax credit and there is no longer an optional additional withholding adjustment for pensions.
“The Making Work Pay credit was created with the passage of the American Recovery and Reinvestment Act, Public Law 111-5, signed into law Feb. 17, 2009, (also known as the stimulus law). The credit equaled 6.2 percent of a taxpayer’s earned income up to a total credit of $400 for individuals and $800 for joint filers. Last year, the IRS asked employers to use the new withholding tables to adjust workers’ take-home pay to account for the new credit as soon as possible emphasizing that employees did not have to fill out a new W-4 withholding form, and that the adjustments would automatically be made based on the 2010 withholding tables. Those withholding tables also affected federal retirement payments. With the expiration of the temporary credit, IRS tax withholding tables have changed for 2011, and many retirees may see an increase in the amount of federal tax being withheld from their monthly annuity payments as a result.
“It is important to keep in mind that, like all employers, OPM uses tax withholding tables that are provided by the IRS, and questions about changes to those tables must be referred to the IRS, not OPM.”