U.S. Military (Ret.): Law change means higher withholding, but doesn’t raise tax rate - Military Retirement - Navy Times

U.S. Military (Ret.): Law change means higher withholding, but doesn’t raise tax rate

Several readers have written in over the past few weeks with concerns about federal income tax withholding. The most recent:

Q. I have been retired since 1977 and just received my 1099 statement saying my withholding will be increased effective March 1. I was under the impression that the Bush tax cuts were extended. Did I miss something?

No, your taxes did not go up. What happened has nothing to do with the Bush tax cuts; rather, it stems from the Obama administration’s American Recovery and Reinvestment Act of 2009, which contained something called the “Making Work Pay” tax credit.

For military retirees, the impact of the credit temporarily boosted paychecks in 2009 and 2010 by reducing federal income tax withholding rates — and also reducing any refund retirees were due after filing their taxes.

The idea was to temporarily lower withholding to put more money in people’s hands immediately, in hopes that they would spend it and stimulate the economy.

The provision initially was enacted for two years and set to expire at the end of 2010. Congress chose not to renew it, which is why the Defense Finance and Accounting Service is sending letters to retirees to tell them that withholdings have reverted to previous levels.

The expiration of the tax credit does not increase your overall tax burden — it merely increases the amount of taxes withheld, which sorts itself out when you file your annual federal income taxes. If too much is withheld, you get a refund; if not enough is withheld, you pay the IRS the difference.

Anyone can change their tax withholding status. Some people like to have more taxes withheld than they owe so that they get a fairly large refund when they file their taxes — a sort of lump-sum bonus.

Conversely, having less tax withheld than you owe will put more money in your hands now, but you will have to repay the IRS when you file.

As an aside, the initial plan for applying the tax credit to military retirees was to focus on those with second-career earnings, not those whose sole income source is their military retired pay. However, DFAS’s payroll system could not distinguish between those two groups, so the tax credit was applied to all retirees.

DFAS cannot advise retirees on their tax withholding decisions. If you have questions, you should contact a tax adviser or the IRS.

If you do decide to change your withholdings, you can do so through an electronic myPay account, if you have one, or by completing an IRS Form W-4 and faxing it to 800-469-6559 or mailing it to: Defense Finance and Accounting Service, U.S. Military Retirement Pay, P.O. Box 7130, London, KY 40742-7130.

Retired Command Master Chief Alex Keenan served 28 years in the Coast Guard. E-mail him.