Federal tax change surprises retirees
Thousands of state and local government retirees have been calling the Virginia Retirement System about why federal tax withholding suddenly will take more of their monthly pension.
The answer lies more with the Internal Revenue Service than with VRS, which fielded more than 1,600 telephone calls and 2,500 voice-mail messages Monday from concerned retirees.
Their concern is an annual VRS notice of monthly pension benefits, which shows a sharp increase in withholding for federal taxes. The change doesn't reflect any increase in tax liability, but withholding increased because of the expiration of a provision of the federal stimulus act on Dec. 31.
"Why weren't we forewarned that this was coming?" asked Robert Bailey, 67, a retired Colonial Heights teacher whose new monthly benefit reflects a 53 percent increase in federal withholding, or more than $48 a month.
The American Recovery and Reinvestment Act featured a stimulus payment to wage earners that reduced their withholding by $400 a year, while offering them an equal tax credit under the Making Work Pay provision. The law resulted in a reduction in federal tax withholding on May 1, 2009, causing increases in monthly benefit payments for about 60 percent of retirees in the state system, according to an explanation posted on the VRS website Tuesday.
With the law's expiration at the end of last year, the amount withheld increased and pension payments went down.
"The (tax) tables are just going back to where they used to be," said VRS Director Robert P. Schultze.
Schultze said VRS asked IRS not to change the tax tables in 2009 for retirees because they wouldn't be eligible for the tax credit unless they had earned income in addition to Social Security and pension payments.
He said VRS sent a notice to retirees more than a year ago advising them to be sure they didn't withhold too little to pay their full tax obligation, but it did not warn them when the provision was about to expire.
To make matters more confusing, a federal law took effect this month that lowers Social Security tax rates for employees by 2 percent, but that won't benefit retirees who no longer work.
"Somebody let the retirees down," Bailey said.
mmartz@timesdispatch.com
(804) 649-6964
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