Little-Known Glitch: "Making Work Pay" Tax Credit Improperly Applied to Millions of Retirees in 2010, Creating Surprises on Tax Returns.
Millions of seniors are in for an unpleasant surprise when they file their tax returns over the next few weeks. The Making Work Pay tax credit was incorrectly applied to an estimated 13.4 million taxpayers in 2010, many of them seniors, according to the Treasury Department. This leaves many retirees unexpectedly owing hundreds of dollars in taxes, and in some cases paying undue penalties for last year.
The tax credit, a provision of the 2009 stimulus legislation, was advanced to taxpayers in 2009 and 2010 in the form of higher payroll and pension checks (due to lower federal income tax withholdings being deducted from them). Eligible people qualified for a credit of up to $400. But millions of taxpayers were either advanced the tax credit without being eligible for it, or they were advanced more of the credit than they were entitled to.
One glitch affected working seniors who also received Social Security, Supplemental Security Income (SSI), railroad retirement or veterans' disability compensation. They qualified for a separate $250 economic stimulus payment that should have reduced their maximum Making Work Pay tax credit to $150. But the IRS withholding tables used by employers did not adjust for those payments.
Seniors receiving pensions were affected as well, because the IRS tables allowed reduced withholdings for pensions "even though such income was not even eligible for the credit, which only applied to income earned from a job.
Married couples who worked and also received a pension are at greatest risk and could potentially owe as much as $1,600.
Because the faulty tax tables caused many people to owe taxes they didn't expect to owe, the IRS has allowed penalties to be waived for the 2009 and 2010 tax years. But the waivers are only given if taxpayers explicitly request them. According to the Treasury Inspector General, last year virtually no taxpayer surveyed knew they could request a waiver.
The Senior Citizens League supports efforts to repeal or reform the way Social Security benefits are subject to taxation. Even though retirees already paid taxes during their working years to fund the Social Security system, their benefits are also taxed once they rise above $25,000 a year. Every year the benefits of more retirees are subject to tax, because the federal government does not adjust the income levels annually as is routinely done with income tax brackets.
Social Security recipients are also required to compute their taxes using a special formula that factors in "provisional" income, including supposedly "tax-free" money such as tax-free municipal bonds or proceeds from ROTH retirement accounts.
"Many seniors will be surprised to find they owe money on their tax returns for 2010 because of the way the IRS implemented the Making Work Pay tax credit," said Larry Hyland, chairman of The Senior Citizens League. "We urge affected seniors to file their penalty waivers. We also urge the government to eliminate what amounts to double taxation of Social Security benefits, by removing taxes on those benefits."
With 1.2 million supporters, The Senior Citizens League is one of the nation's largest nonpartisan seniors groups. Its mission is to promote and assist members and supporters, to educate and alert senior citizens about their rights and freedoms as U.S. Citizens, and to protect and defend the benefits senior citizens have earned and paid for. The Senior Citizens League is a proud affiliate of The Retired Enlisted Association. Visit www.SeniorsLeague.org for more information.
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