A senior citizens advocacy group is warning that millions of elderly taxpayers are finding themselves in the position of unexpectedly owing hundreds of dollars in back taxes as a result of the Making Work Pay tax credit, and in some cases paying penalties.

The tax credit, a provision of the 2009 stimulus legislation, was advanced to taxpayers in 2009 and 2010 in the form of higher payroll and pension checks, due to lower federal income tax withholdings being deducted from them. Eligible people qualified for a credit of up to $400. But millions of taxpayers were either advanced the tax credit without being eligible for it, or they were advanced more of the credit than they were entitled to under the law. 

One glitch affected working seniors who also received Social Security, Supplemental Security Income, railroad retirement or veterans' disability compensation, according to the Senior Citizens League. Seniors qualified for a separate $250 economic stimulus payment that should have reduced their maximum Making Work Pay tax credit to $150. But the IRS withholding tables used by employers did not adjust for those payments.

Seniors receiving pensions were affected as well, because the IRS tables allowed reduced withholdings for pensions — even though such income was not even eligible for the credit, which only applied to income earned from a job.

Married couples who worked and also received a pension are at greatest risk and could potentially owe as much as $1,600.

Because the faulty tax tables caused many people to owe taxes they didn't expect to owe, the IRS has allowed penalties to be waived for the 2009 and 2010 tax years. But the waivers are only given if taxpayers explicitly request them. According to the Treasury Inspector General for Tax Administration, last year virtually no taxpayer surveyed knew they could request a waiver (see 13.4M People May Owe More Taxes Because of Making Work Pay Credit).

The Senior Citizens League said it supports efforts to repeal or reform the way Social Security benefits are subject to taxation. Even though retirees already paid taxes during their working years to fund the Social Security system, their benefits are also taxed once they rise above $25,000 a year. Every year the benefits of more retirees are subject to tax, because the federal government does not adjust the income levels annually as is routinely done with income tax brackets.

Social Security recipients are also required to compute their taxes using a special formula that factors in "provisional" income, including supposedly "tax-free" money such as tax-free municipal bonds or proceeds from ROTH retirement accounts.

"Many seniors will be surprised to find they owe money on their tax returns for 2010 because of the way the IRS implemented the Making Work Pay tax credit," said Senior Citizens League chairman Larry Hyland in a statement. "We urge affected seniors to file their penalty waivers. We also urge the government to eliminate what amounts to double taxation of Social Security benefits, by removing taxes on those benefits."

In response to the report that TIGTA issued last December on taxpayers who owed money last year as a result of the credit, IRS management said the agency planned to continue to do outreach efforts, but declined to contact taxpayers who owed any penalty based on the Making Work Pay credit. When asked about the claims by the Senior Citizens League, an IRS spokesperson cited the IRS response in that TIGTA report, along with a Web page on the IRS site containing information on how to adjust the withholding for the Making Work Pay credit.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access