Today the IRS announced new tax “withholding adjustment procedures” for pension plans today, repairing a problem that we raised in a letter to the Treasury Department on April 1. 

As we wrote last month, the Making Work Pay Tax Credit is designed to stimulate the economy by having employers withhold less taxes from employees’ paychecks.  Accordingly, the I.R.S. issued new tax withholding tables to reflect the lower withholding.  Paying less taxes sounds great – except that these are the same tables that pension plans use to calculate tax withholding on pensions. 

Because the tax credit doesn’t apply to pensions, non-working retirees who aren’t eligible for the tax credit might have had too little tax withheld and could have ended up owing money at tax time next year.  For retirees living pension check to pension check, an end-of-the-year tax liability would have been an unfair burden. 

We applaud the Treasury for correcting this oversight and issuing new withholding procedures specifically for pension plans.  Thanks also to AFSCME and the other groups that helped bring this issue to light.

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