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The American Recovery and Reinvestment Act of 2009 has a special provision for working Americans, called the “Making Work Pay” tax credit. This is a refundable tax credit of 6.2 percent of earned income, up to $400 for working individuals and $800 for married taxpayers. In other words, rather than getting a stimulus check, workers will have less tax to pay for 2009. To get the money into taxpayers’ wallets quickly, the IRS has already issued new tax withholding tables. The problem: military retirees, even though they are not eligible for the credit, will have less tax withheld under the new “one-size-fits-all” IRS withholding guidelines, and may get an unpleasant surprise on their 2009 tax bill when they find that they owe more than they expected.

The new IRS withholding rules were implemented by the Defense Finance and Accounting System (DFAS) on April 1st. Those who do not want to face a larger tax bill next April can ask DFAS to revert them back to having a higher amount withheld. Or they can set that extra money aside in an interest-bearing account and earn a little on it before it goes back to Uncle Sam.

Here are some scenarios and possible solutions from the Association of the US Army (AUSA), taking into account the fact that the stimulus law also provides a $250 payment to those drawing Social Security or VA disability compensation:
 
• Non-working military retirees with Social Security or VA disability compensation
o Will get a $250 check from Social Security or the VA soon, and will end up having $400/$800 (single/married) less withheld from their retirement checks this year, but will still owe that money when they file taxes next year.
o SOLUTION: DFAS executed the new withholding on April 1, therefore retirees in this category can ask DFAS to restore the previous, higher withholding amount (note: the reduction in withholding will not appear in checks until May 1.)
 
• Working military retirees who DON’T receive Social Security or VA disability compensation
o Will have $400/$800 less withheld from BOTH their military retired pay AND from their employer’s pay – a total of $800/$1,600 less withheld, which means they’ll have to pay $400/$800 of that back when they file their 2009 taxes next year (you can only get the tax credit once).
o SOLUTION: People who don’t want that to happen can ask EITHER DFAS or their employer to restore the original higher withholding now.
 
• Working military retirees who DO receive Social Security or VA disability compensation
o Will get the $250 payment soon and will ALSO have $400/$800 less withheld from BOTH their military retired pay AND from their employer’s pay -- a total of $800/$1,600 less withheld. BUT the total tax credit they can qualify for will be $400/$800, and the $250 counts against that. That means they’ll end up having to pay back $650 (single) or $1,050 (joint filer) of that money when they file their 2009 taxes next year.
o SOLUTION: If they don’t want that to happen, they should ask DFAS and/or their employer to increase their withholding an extra $100-$180/month for the rest of the year so they come out even.