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Higher tax bill may loom for some troops, retirees

Jan. 21, 2010 - 12:48PM   |   Last Updated: Jan. 21, 2010 - 12:48PM  |  
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Higher tax payments or lower refunds could await some troops and retirees as a result of a tax credit that went into effect last spring in conjunction with the Obama administration's 2009 economic recovery plan.

Most working Americans are eligible for the "Making Work Pay" credit of up to $400 for single individuals and up to $800 for married couples. The credit, administered by employers in the form of slightly higher paychecks, took effect in April 2009 and will be paid through the end of 2010.

The IRS adjusted its withholding tables last year so taxpayers could see the benefit with each paycheck, IRS spokesman Eric Smith said. But the change means husbands and wives who both work, and working-age military retirees who hold jobs — especially those who hold more than one job — could see higher tax bills this spring and next unless they have increased the amount of money withheld from their paychecks.

"If you're a working retiree, it got applied to your retired pay; it also got applied to your second-career employment," said Steve Strobridge, director of government relations for the Military Officers Association of America. "But you only get to claim it once. And nobody did any cross-checks."

The result, he said, is that many people could get an unexpected tax hit because they had less money withheld from paychecks than they thought.

The liability will increase, Strobridge said, if the spouse also worked last year — a hit that will be even greater if the spouse is also a military retiree.

"They could have had four $800 payments deducted if they're not paying attention," Strobridge said. If they had qualified for the full credits, half of what they received will have to be repaid with this year's federal taxes.

Retirees and annuitants also were subject to the lower withholding. But because taxable pensions are not considered "earned income," they will have to repay the government when they file this year, the IRS said.

The credit must be claimed on both 2009 and 2010 tax returns using IRS Schedule M.

Taxpayers who want to adjust the amount of tax withheld from their paychecks must fill out a new Form W-4. Information and downloadable forms are http://www.dfas.mil/retiredpay/taxinformation.html">available from DFAS.

A different problem is vexing retirees and others who report an increase in withholding as of their Jan. 1 paychecks. That is because the withholding reduction spanned eight months in 2009 but will span all 12 months this year, so taxpayers "get back" less per month because more is withheld per check this calendar year.

Also, IRS withholding tables changed somewhat with the New Year, which increased withholding on some taxpayers.

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