Higher federal withholding is taking a bite out of retirees' annuity checks

Washington Post Staff Writer
Thursday, February 10, 2011; 11:10 PM

The Federal Diary gets lots of mail, some of it fit to print. From time to time, we give readers a chance to speak out on issues affecting federal workers.

Retirees have been speaking out quite a bit after getting annuity checks that were lower than expected because of increased federal withholding. They often say the smaller checks come on top of no cost-of-living adjustments for two years and higher health insurance premiums.

This letter is representative of many sent to the Federal Diary:

Thanks for the column on the increase in income tax withholding from federal pensions. Since my husband and I are federal retirees, our recent tax bite totaled about $100 (yikes!). This in the face of a pension that did not get a cost-of-living adjustment last year. All the while, costs continue to rise in all spheres.

I did go to the Office of Personnel Management's Web site prior to your column (as directed on the mailed statement we received) but did not get an answer as to why the withholding increased. Your note about the Making Work Pay tax credit was at least a crumb of information about the situation.

I then went to the IRS site to get more info on this now-expired tax credit that none of us knew existed in the first place! It gives some general information in the FAQ section but nothing that specifically applies to federal retirees. It only says that private pension holders are not eligible for the credit.

Any chance you could find out further information on this? I am assuming it has affected most if not all federal retirees.

- Martha Sewell, Falls Church

The suddenly shrinking checks have hit retirees generally, not just those who were employed by the federal government. On Thursday, the IRS posted information on "Why Employees and Retirees May See Changes in 2011 Payments and Withholding."

The OPM had provided an explanation for the bigger tax bite, but some retirees found the explanation wanting. As the Diary reported this month, the OPM said the expiration of a tax credit resulted in smaller checks for some annuitants.

"On December 16, 2010, Congress elected not to extend the 'Making Work Pay' credit," the OPM said. "The 'Making Work Pay' credit, part of the 2009 Stimulus Package, expired on December 31, 2010. This could mean higher federal tax withholding amounts in monthly annuities for federal retirees."

But astute retirees noted that President Obama had said the tax law, which included termination of the Making Work Pay credit, would result in higher, not lower, paychecks.

"Congress and President Obama said no tax increases, so how can the IRS decide to increase our taxes?" wrote Joan Bromiley of Burke.

During a Dec. 17 signing ceremony for "the Middle-Class Tax Cuts Bill," Obama said: "In fact, not only will middle-class Americans avoid a tax increase, but tens of millions of Americans will start the New Year off right by opening their first paycheck to see that it's actually larger than the one they get right now. Over the course of 2011, 155 million workers will receive tax relief from the new payroll tax cut included in this bill - about $1,000 for the average family."

So why are so many retirees receiving less money?

Sandra Salstrom, a Treasury Department spokeswoman, said the two-percentage-point Social Security tax reduction enacted in December, which is resulting in the larger paychecks Obama referred to, does not affect retirees' checks because they don't pay Social Security taxes on their pension payments. They do pay income taxes, which were not reduced.

"Pension recipients don't receive paychecks," Salstrom said, "and the president referred to the 155 million 'workers' that will receive tax relief from the new payroll tax cut."

"Workers," in this case, is a category that does not include retirees.

The OPM said retirees can affect the amount of their checks by changing their federal tax withholding deductions at www.opm.gov/retire or by calling the OPM at 888-767-6738 from 7:30 a.m. to 8 p.m. "Changing the amount of your withholding will not reduce your tax liability at the end of the tax year," the OPM said. "You may also want to consider contacting your tax advisor."

Several readers also said they did not get adequate or timely information about the bigger tax bite from the OPM. Director John Berry said the agency is increasing its staff to improve retiree services.

Bill Zielinski, the agency's associate director of retirement services, said that many who called the OPM with questions were met with busy signals.

"We're receiving many, many calls from our retirees," he said, "at a rate many times greater than usual."

Zielinski said annuitants can e-mail inquiries to retire@opm.gov.

Links to IRS and OPM information on the tax withholding can be found with this column at washingtonpost.com/fedpage.

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