The Federal Stimulus Bill: FAQ

One of the goals of the American Recovery and Reinvestment Act (ARRA), known as the federal stimulus bill, is to put more money into taxpayers’ pockets quickly and efficiently, to encourage spending and stimulate the economy. To accomplish this, instead of going through the time-consuming bureaucracy of issuing rebate checks, the ARRA lowered tax withholding rates for workers and retirees beginning April 1, 2009 and continuing through 2010.

For you, our MTRS retirees, this means that if your federal income taxes are withheld from your monthly benefit payment based on:

• marital status and the number of exemptions claimed (the IRS tax tables), the net amount of your monthly benefit may have changed as a result of the new tax rates. The decrease in your federal tax withholding will result in a corresponding increase in your monthly payment. (In fact, the new tables may lower your taxes so much that no tax is withheld from your benefit payment.)
• a set dollar amount—including zero dollars, meaning that no taxes are withheld from your monthly payments—your benefit amount will not change as a result of the new tax tables.

If you would like to change your federal tax withholding amount or method, please submit a revised Substitute W-4P form (pdf, one page), and be sure to read the following information.

I have my taxes withheld based on the IRS tax tables. What does this mean for me?
What do I need to do?
How do I change my tax withholding?
I’m confused. Where can I get more information?
Additional reference: A summary of certain provisions of the ARRA

I have my taxes withheld based on the IRS tax tables. What does this mean for me?

The new tax tables decrease the amount of your monthly benefit that is withheld for the payment of taxes, resulting in a higher monthly benefit for you during 2009 and 2010 than under the “old” tables. Depending on your particular situation, however, receiving a higher benefit payment for the rest of 2009 and 2010 may result in your owing money when you file your returns for 2009 and 2010. On the other hand, for some of our members, the amount withheld will be just right to avoid owing money. To determine which group you are in, please consult a professional tax advisor.

What do I need to do?

You don’t need to do anything, but, depending on your personal circumstances, you may or may not want to change your tax withholding with us. If you want to:

• continue receiving more money in your benefit payment for the remainder of 2009 and all of 2010, you do not have to do anything; we will withhold your federal taxes according to the new tax tables beginning in April 2009, and continue to do so until you tell us otherwise.
• LOWER the amount withheld from your monthly benefit, you may want to adjust your tax withholding to claim fewer withholding allowances or request additional amounts to be withheld (see How do I change my tax withholding?).
• KEEP your withholding at the same amount that it was before April 1, 2009, you will need to complete and send us a Substitute Form W-4P (pdf, one page) and indicate your desired withholding as a flat, monthly amount. You can find your pre-April 1, 2009 monthly withholding amount on your pension check stub or direct deposit statement from January, February or March 2009.

How do I change my tax withholding?

Simply download a Substitute Form W-4P (pdf, one page), and complete and send it to our main office. Be sure to mail your form so that it is received in our office by the 15th of the month in which you want the change to occur.

I’m confused. Where can I get more information?

Because everyone’s financial and personal situation is unique, we cannot advise you what do to. We urge you to discuss these tax table changes with a qualified tax advisor, or to visit the IRS website at www.irs.gov and use the Withholding Calculator, review the Tax Tables found in Publication 15-T, or refer to IRS Publication 919 (How Do I Adjust My Tax Withholding?).

Additional reference: A summary of certain provisions of the ARRA

There are several tax provisions of the ARRA that affect members of governmental retirement plans like the MTRS. For your reference, below is a summary of these provisions.

1) New Tax Withholding Tables/Making Work Pay Credit

The IRS has formally stated its position under Publication 15-T that the new withholding tables are to apply to workers and pensioners. The IRS has also indicated informally that the withholding tables apply also to governmental plan retirees such as retirees of the Massachusetts Teachers’ Retirement System. The new withholding tables must be implemented by April 1, 2009.

Please be aware that the Federal government mandates the new tax tables. In the event that you need to make a change to your withholding you must file a Form W4-P indicating your request for a change.

The “Making Work Pay Credit” (“MWP”) provides that an “eligible individual” is entitled to a credit against income tax for the taxable year of “an amount equal to the lesser of (1) 6.2% of earned income of the taxpayer, or (2) $400 ($800 in the case of a joint return).” The MWP Credit is a refundable credit available when filing your 2009 federal income taxes and is treated as an overpayment of taxes.

Please note, Governmental retirees whose sole source of income for an entire tax year consists of retirement benefits paid in the form of an annuity or pension will have no “earned income” for MWP Credit purposes and may not qualify, but might qualify for the Federal/State Retiree Credit.

The MWP credit is reduced if a member also receives the Federal/State Retiree Credit or Social Security/Railroad Retirement Payment (see below).

2) The Federal/State Retiree Credit

Is an uncodified provision that allows “eligible individuals” a one-time $250.00 refundable credit against income tax for the first tax year beginning in 2009. The credit is $500.00 for a joint return where both spouses are eligible individuals.

An “eligible individual” is defined in part as any individual “who receives during the first taxable year beginning in 2009 any amount as a pension or annuity for service performed in the employ of the United States or any State, or any instrumentality thereof.” This provision is directed to individuals who receive a government pension or annuity from work not covered by Social Security.

3) Social Security/Railroad Retirement Payment

Provides for a one-time economic recovery payment of $250.00 to people who are eligible for and receive Social Security benefits, Railroad Retirement benefits, or veteran's compensation or pension benefits. The law requires the Department of the Treasury to deduct delinquent child support and debts owed to state and Federal agencies from the one-time payment. The federal government expects to issue this payment later this calendar year.

Credits cannot be combined, so if a retiree gets the $250 one-time payment this spring, he or she will not be able to claim the $250 credit for pensioners in his or her 2009 tax return. If he or she also qualifies for the Making Work Pay Credit (up to $400 for individuals and $800 for couples, phased out for workers earning over $75,000) any amounts that he or she qualifies for through the Economic Recovery Payment or the Refundable Credit for Pensioners will be subtracted from that.