Economic Stimulus Tax Cut Is Misleading For Retirees


This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.

In February, President Obama signed the American Recovery and Reinvestment Act of 2009. This act includes a tax credit on “earned income” which should have been reflected on your pay checks starting in April. Specifically, individuals with MAGI (modified adjusted gross income) of up to $75,000 will receive the lesser of 6.2% of their MAGI or $400 credit in 2009 and 2010. Married couples with MAGI up to $150,000 will receive the lesser of 6.2% or $800 credit this year and next.

Don’t Celebrate Too Early

So far, so good, but if your retirement check got bigger in April, don’t start celebrating because you did not qualify for the tax credit.

“Why then”, you ask, “did my check go up?”

Good question. Your check was bigger because the income tax withholding tables have been adjusted to reflect the new, lower tax rate. However, the IRS definition of “earned income” (see first paragraph) does not include interest, dividend or pension payments. The net result is that although you are taking home more money each month, but you will pay it back when you file your 2009 taxes. If you normally receive a refund, you will receive less. If you normally send the IRS a check, you will send them a bigger one.

So what should you do?

If you are married and your 2009 income hasn’t substantially changed from 2008, simply plan for about $800 negative impact when you file your taxes next year. If you normally get a refund of $1,000 or more, you might want to do nothing, but plan on a much smaller refund. However, if you normally break even or send the government a check, you should consider filling out a new W-4P form in order to increase the amount of withholding back to what it was before the tax tables changed.

Either way, it is a good idea to discuss your specific situation with your tax advisor. Just be aware that your retirement pay bump is a mirage.

Note: This article is not about the $250 checks being sent out to many Social Security recipients. If you get one of these checks, you should be able to keep it, unless you also have earned income. Nothing is simple is it?

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Jeff Rose

Jeff Rose, Certified Financial Planner™ from Illinois. Jeff is also an Iraqi combat veteran, In-N-Out burger addict, and loves to do Crossfit.

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