Q: My father has been a retired Department of Defense Civil Service employee since 1989. He received a pay cut of $48 for the first time this month with no explanation. We can find no evidence that a federal pay cut was implemented. Do you have any information regarding this?
A: According to the National Active and Retired Federal Employees Association: 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 IRS 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.
As a reminder, federal annuitants receiving payments from OPM can change their tax withholding amounts for both federal and state taxes by contacting OPM. Retirees can call OPM at 1-888-767-6738, or make changes using Service Online at www.opm.gov/retire. We would also suggest retirees use the OPM online tax withholding calculator at the same site before making a change to their monthly tax withholding to make sure they do not under withhold which could result in paying out of pocket additional federal tax that may be due at the end of the year.
NARFE members who are unhappy about the expiration of the Make Work Pay tax credit should direct their complaints to their own representative and senators. NARFE is consulting with our coalition partners in the Leadership Council of Aging Organizations regarding congressional action on this issue.
While retirees’ and survivors’ anger about the expiring tax provisions is justified, NARFE members need to stay focused on the more critical and immediate threat of the unprecedented spending cuts Congress is considering, particularly proposals to reduce the earned retirement, pay and health benefits of federal employees and annuitants.