Obama Tax Breaks May Confuse Seniors

Donald Lambro

5/6/2009 12:01:00 AM - Donald Lambro

WASHINGTON -- Social Security beneficiaries will get a one-time $250 bonus payment this month from President Obama's economic-recovery program that works out to $4.80 a week.

What the administration's "good news" notification letter didn't tell working senior citizens is that some of them will have to give all or part of the money back when they pay their taxes next year.

That eventuality sets up a confusing paperwork situation that will bring additional tax-compliance costs to working beneficiaries already struggling to pay quarterly taxes in their older years.

"This is a compliance headache that borders on being a nightmare. It's going to be complicated to reconcile these payments," said Kevin Hassett, economist at the American Enterprise Institute.

The checks that will go out later this month to millions of Social Security retirees and beneficiaries of other federal entitlement programs are part of a little-noticed provision in the $800 billion economic-recovery bill. But the notices left some recipients -- who work full or part time to supplement their income -- wondering if they will also get to keep Obama's Making Work Pay (MWP) tax cuts for lower- to middle-income workers.

In the murky world of tax-policy provisions, the answer seems to be that they can't fully benefit from both. But one finds little, if any, discussion of this in either the Internal Revenue Service explanations or the Social Security Administration's letter that went out to 50 million recipients.

"It's not well-known. I have seen no publicity to tell people drawing Social Security that they are not eligible for both the Social Security payment and the Making Work Pay tax credit," said Roberton Williams, senior fellow at the Tax Policy Center in the Urban Institute and a former tax analyst for the Congressional Budget Office.

"The only people who know this are those who carefully read the stimulus bill -- it's only 600 pages long," Williams told me. Here's the story.

Congressional and IRS officials say that you cannot double-dip into both programs and that if you are getting the bonus Social Security payment and also benefit from a lower withholding in your paychecks at work, the two will have to be reconciled when reporting income to the IRS.

"Beneficiaries who are working full time and collecting Social Security benefits will receive the one-time Social Security payment, as well as the portion of the Making Work Pay tax credit for which they are eligible," explained Matthew Beck, Democratic spokesman for the House Ways and Means Committee, which wrote the economic-recovery tax-cut provisions.

"However, workers receiving the full MWP tax credit will not be allowed to retain the $250 payment -- they will have to reconcile the payments when they file their taxes in 2010," Beck said.

Williams explained it this way: "Say they're reducing your withholding for the last nine months of this year by $400 for a single worker; now subtract the $250 from the $400, and you will get a $150 credit," he said. "Effectively, you do not get to keep the $250 if you are working enough to get the full $400 tax credit.

"You can get up to $400 total between the Social Security payment and the Making Work Pay tax withholding, but you can't get more than that," he said.

However, in an e-mail response to my questions, an IRS representative described this thorny tax-compliance thicket in more benign language that seemed to suggest that workers might have some discretion over how they treat the payment when in fact they don't.

"Individuals receiving (Social Security) payments under the economic-recovery provision may want to evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding," the IRS official told me.

Obama's Making Work Pay tax credit amounts to 6.2 percent of each worker's income, giving them up to $800 in tax cuts for married couples filing jointly and up to $400 for individuals.

"The tax credit will mean $20.50 a week for joint filers and $10.25 a week for individuals," said Mark Robyn, a tax analyst at the nonpartisan Tax Foundation. "It's really not that impressive."

But many Americans will see no change in the tax withholding in their paychecks. The MWP tax cuts are phased out for married couples who file a joint return whose adjusted gross income (AGI) is between $150,000 and $190,000, and for single workers whose AGI is between $75,000 and $95,000.

Meantime, some analysts think there is something wrong about making senior citizens give back some or all of their one-time economic-recovery payment that is geared to helping people in the midst of a severe recession.

"This certainly renders the 'Making Work Pay' label frustratingly ironic for working seniors. We should be giving seniors incentives to stay in the workforce, not to leave it," said Chuck Blahous, a former adviser to President George W. Bush on Social Security policy.