We received a surprise when we got the statement from our pension fund. The federal withholding went from $74 to $9. Calling the pension fund thinking there was some mistake we were told that the IRS had changed the tax tables. Because we had to pay the federal government this year I roughly calculated what we will pay on our 2009 income and there will not be enough withholding taxes at the new rate. So I researched the news and came up with this from the AP:
Under the headline 'Some retirees face even bigger headaches,' the article is as follows:
The Social Security Administration is sending out $250 payments to more than 50 million retirees in May as part of the economic stimulus package. The payments will go to people who receive Social Security, Supplementary Social Security Income, railroad retirement benefits or veteran's disability benefits.
The payments are meant to provide a boost for people who don't qualify for the tax credit. However, they will go to retirees even if they have earned income and receive the credit. Those retirees will have the $250 payment deducted from their tax credit—but not until they file their tax returns next year, long after the money may have been spent.
Retirees who have federal income taxes withheld from pension benefits also are getting an income boost as a result of the new withholding tables. However, pension benefits are not earned income, so they don't qualify for the tax credit. That money will have to be paid back next year when tax returns are filed.
So if you are retired and get a pension, check to see if your withholding federal tax rate has changed. You will have to pay on April 15, 2010 if there was not enough withheld.