IRS fixes glitch that caused new tax credit to incorrectly boost retirees’ pension payments

IRS gives pension plans fix for tax credit glitch

WASHINGTON — The IRS on Thursday offered pension plans a way to fix a glitch that has been causing the new Making Work Pay tax credit to incorrectly boost pension payments to retirees.

Many retirees have been receiving additional money they are not entitled to, money that will have to be repaid at tax time next year, either through a smaller refund or a larger tax bill.

The glitch will still affect millions of other taxpayers who will continue to receive money they are not entitled to. The IRS said it is planning an outreach campaign to educate at-risk taxpayers, including married couples in which both couples work, individuals with multiple jobs and Social Security recipients who also have jobs that provide taxable income.

The problem stems from new tax withholding tables issued by the Internal Revenue Service in February. The tables were designed to deliver the new tax credit by boosting workers’ pay a few dollars each week. Individuals are eligible for up to $400 and couples up to $800 in 2009 and 2010.

Retirees who have federal income taxes withheld from pension benefits also have been getting an income boost from the new withholding tables. However, pension benefits are not earned income, so they don’t qualify for the tax credit.

On Thursday, the IRS offered pension plans a new set of tax tables to increase the amount of taxes withheld, so retirees won’t be in danger of getting an unexpected tax bill next year.

The IRS and private tax experts encourage all taxpayers to make sure they have adequate taxes withheld from their paychecks.

Married couples in which both spouses work might consider having taxes withheld at the higher rate for single filers. If workers have multiple jobs, they might consider having extra taxes withheld by one of their employers.

The tax credit was enacted as part of the government’s massive economic recovery package.

On the Net:

IRS: www.irs.gov