Tax experts warn: Take another look at withholding

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The federal government has put a little extra cash into the hands of Americans by requiring employers to withhold less federal tax, resulting in bigger paychecks and monthly pension payments.

A glitch, however, may result in an unpleasant tax-time surprise for pension recipients next year, says the Pension Rights Center, a consumer organization that promotes retirement security. While the intention of the American Recovery and Reinvestment Act is to encourage some spending to jolt the sluggish economy, the change could inadvertently hurt retirees who have taxes withheld from their pension but don't have any earned income.

The reason is because they would not be eligible for the Making Work Pay tax credit, which was put in place to help ensure that taxpayers would not owe money at tax time because too little was withheld.

Under the change in withholding under the Act, individuals would benefit by up to $400 and for couples filing jointly, the figure is $800. The tax credit was intended to offset the amount of the withholding, but because some filers aren't eligible for it, they'll end up owing taxes - that is, unless those individuals take action.

The IRS says, "Private pension recipients are not eligible for the Making Work Pay credit unless they have earned income. However, because the new withholding tables reduce the taxes withheld from all taxpayers, pension recipients may not have enough tax withheld from their pension benefits to cover their tax liability on those payments." People in this situation should consider filing a new Form W-4P, "Withholding Certificate for Pension or Annuity Payments."

Martha M. Hamilton, a financial columnist for AARP Bulletin, says the IRS website (,,id=204447,00.html) can help you determine whether you should change your withholding, with a form available to do so.

Hamilton writes, "Unfortunately, I think it's likely that few taxpayers will understand the potential danger of owing more money than expected at tax time next spring. I probably pay more attention to tax and retirement issues than most of my friends, and I didn't know about it until I read the letter from the Pension Rights Center. But for those who don't get the word, it could be tough."

Andrea Coombes, a MarketWatch columnist, wrote that withholding tables are a "blunt instrument, unable to precisely assess taxes for millions of taxpayers' unique situations."

Coombes says people who should check their withholding are not only retirees who receive certain types of pensions, but also married people who both work, single people with two jobs, Social Security recipients who work and workers who are claimed as dependents on someone else's tax return.

Bob Trinz, Senior Tax Analyst from the Tax & Accounting business of Thomson Reuters, said an analysis of the new withholding tables produced mixed results. "For some employees, the increase in take-home pay for the balance of the year will be far greater than the allowable MWPC (Making Work Pay Credit); therefore, the amount will be underwithheld unless they file new Form W-4s. The increase in take-home pay for other employees will, more or less, equal the MWPC they are entitled to. Finally, some employees will see little or no change in their take-home pay even though they will be able to claim the full MWPC on their 2009 returns. This last group of employees should file new Form W-4s if they want to see a current benefit from the MWPC."

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