The Economic Stimulus package changed the federal income tax withholding tables (effective April 1, 2009). The package includes a credit on “earned income.” Many working individuals will see a small increase in their paychecks when the new lower federal income tax withholding tables go into effect.

However, the Internal Revenue Service’s (IRS) definition of “earned income” does not include interest, dividend, or pension payments. Therefore, IMRF retirees may not be eligible for this credit. However, IMRF is required to use the new lower income tax withholding tables.

If you have federal taxes withheld from your IMRF pension payment using the IRS tax tables, your federal withholding will be reduced by these new tables. However, you may not be eligible for the new credit unless you are also working while in retirement.

If you are not eligible for the new tax credit and your withholding is reduced by the new tax tables, you may find that you owe money to the IRS when you file your taxes for 2009. In some cases, you may owe a penalty for not having sufficient income tax withheld or for not making estimated payments during the year.

What should you do?

If you have federal income tax withheld from your IMRF pension payment, your April 2009 payment stub will reflect the new lower withholding amount. By reviewing this new withholding amount, you and/or your tax advisor can determine if enough taxes will be withheld for your particular situation. (Note: IMRF cannot provide you with tax advice.)

If you determine that you need additional taxes withheld you can change your withholding by submitting a new Form W-4P to IMRF.

You can also make an estimated payment quarterly to the IRS for the additional amount you feel is necessary to pay the correct taxes during the year.

April 2, 2009