Obama tax breaks may trip up seniors

Social Security beneficiaries received notices last month that they soon will be getting a $250 check courtesy of President Obama’s economic recovery package, but the administration did not say that some recipients may have to give part of it back.

The problem: Seniors who also work and qualify for Mr. Obama’s $400 Making Work Pay middle-class tax cuts may find themselves forced to give back some or all of the Social Security bonus come tax-filing time in 2010.

The result, some economists say, could be serious confusion for tax filers.

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

The one-time payments that will be sent this month to millions of Social Security retirees and beneficiaries of other federal entitlement programs are part of a little-noticed provision in the $787 billion economic stimulus law approved by Congress in February.

But recipients who are still working full or part time to supplement their income may also qualify for Mr. Obama’s Making Work Pay tax cuts, targeting lower- to middle-income workers.

In the murky world of tax policy, the answer seems to be that they can’t fully benefit from both, and the “surplus” has to be sent back to the government.

But there is little if any discussion of this in either the Internal Revenue Service’s notices or the letter that went out to 50 million Social Security recipients last month.

“No, 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,” said Mr. Williams, adding, “It’s only 600 pages long.”

Congressional and IRS officials say taxpayers cannot double-dip into both programs. If you are getting extra Social Security money and benefit from a lower withholding in your paycheck, the two will have to be reconciled when you file your 2009 tax returns next year.

“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,” said Matthew Beck, Democratic spokesman for the House Ways and Means Committee that wrote the tax 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,” Mr. Beck said.

Mr. Williams explains it this way: “Say they are 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 it can’t be more than that,” he said.

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