Stimulus Checks and Working Seniors

The American Recovery and Reinvestment Act of 2009, also known as the Stimulus Package, was signed into law February 17, 2009 (Public Law No. 111-5). The Act provides over $300 billion in investments in infrastructure, energy, information technology and human services, tax credits, and economic aid including tax credits of up to $400 for working individuals ($800 for working families) and stimulus payments of $250 per individual. 

Persons eligible to receive the $250 stimulus payments are those receiving Social Security (including disability payments), Supplemental Security Income (SSI), Railroad Retirement Act benefits, and Veterans Administration benefits. A person receiving a combination of any of these benefits will receive only one stimulus check.  If both partners of a married couple are receiving benefits, each will receive a check.  Seniors receiving these benefits need do nothing to receive them - the checks will automatically be sent by the agencies. Delivery is expected to be completed by the end of May 2009.

Working seniors will also be entitled to the tax credit ("Making Work Pay" tax credit) authorized by the stimulus package if their adjusted gross income is under $75,000 (the credit is phased out for workers making between $75,000 and $150,000). This may cause a problem for those seniors who both work and collect Social Security.

Employers have received new tax withholding tables from IRS that are based on the assumption that the worker is entitled to the entire $400 individual credit if the worker's salary is under the income limit. A problem is created because the Social Security Administration (SSA) will also independently send out $250 checks to all beneficiaries.  This means, if working seniors receiving benefits do not take action, they will receive both the credit through their payroll withholding ($400) and the check from SSA ($250).  However, double-dipping is not allowed, so the government will insist on recovering the extra $250. Working seniors receiving both benefits will find themselves with a higher tax liability than they are expecting next April 15th .

To avoid this problem, working seniors who also receive Social Security benefits are advised to ask their payroll departments to change their withholding so it only reflects the remaining $150 from the tax credit ($400 tax credit - $250 check = $150 withholding). They will then have received the full $400 they are entitled to, $250 directly from SSA and the remaining $150 through their withholding.

A similar problem applies to working seniors who collect a pension. Pension plan distributions (from public or private plans) are not considered to be "earned income" for purposes of qualifying for the new "Making Work Pay" credit; however , the IRS has instructed the payers of pension benefits—your employer via your accounting department—to use the new federal withholding tables. This will result in under-withholding on pension income, causing some to unexpectedly owe hundreds of dollars in taxes at the end of the year. While many plans will take steps to explain the situation, the only way individuals can avoid the problem of under-withholding will be to proactively instruct their pension plan to withhold more from their checks through the rest of the year.