Q. I retired in March 2012. I got a Voluntary Separation Incentive Payment paid to me after I retired. I started my Social Security at that time. I have recently gotten several confusing letters from the Social Security Administration saying I owe them different sums of money for overpayment due to having too much income. They are including my buyout gross payment as regular income.
Is there some official source you can give me to pass onto them that my $25,000 should not be considered in my earnings putting me over the limit for receiving benefits following my retirement. I am submitting a Form 131, but it just refers to severance, and I can’t find an absolute statement that says VSIP payments fall in that category. I have heard it informally as severance due to retirement, but I would like something official.
A. The Office of Personnel Management automatically withholds the following taxes from the VSIP:
Federal tax – 25 percent
State tax – 4 percent if applicable
Local tax – 1 percent if applicable
Medicare – 1.45 percent FERS and CSRS employees
OASDI – 6.20 percent FERS of Post-1983 (CSRS Offset) employees
According to OPM, “IRS procedure considers such buyout payments as ‘supplemental payments’ and provides two methods by which we can calculate your federal tax. The two methods are:
1). A flat rate of 25; or
2). By withholding federal tax as though the supplemental payment is a single payment for a regular pay period. We have chosen method one, which is the most favorable.”
The confusion may have arisen because you retired at the beginning of a year. As such, you are covered by the “first year rule.” To see how that might apply in your case, go to www.ssa.gov/retire2/rule.htm.