Why Did Your Federal Annuity Payment Go Down?

We have received numerous queries from readers asking why their annuity payments decreased in January. Here is our explanation of what has occurred.

A number of readers have written to us in the past few days asking why their federal retirement annuity was reduced this year. In fact, we have had more queries about this than just about any topic in recent months.

Here is one query that is similar to the many others we have received:

“Several federal retirees I know (including my husband) got a that their retirement checks would change because of an increase in health care plan (premiums), but then noticed federal taxes had also increased (with no mention of this). What can you tell us about this increase?”

There are two reasons for this.

First, according to the Office of Personnel Management, “[T]he Internal Revenue Service (IRS) did not release the 2011 income tax withholding tables until mid-December 2010. OPM did not receive the tax withholding tables in time to apply them to your January 3, 2011 annuity payment.”

In plain English, Congress voted to extend the tax cuts passed under the Bush administration in December 2010. Because of this, your income tax did not go up in 2011 (assuming that you are part of the population that pays a federal income tax).

According to Carol Schmidlin in her article Paying Down Our Deficit: Are Higher Income Tax Rates a Viable Option?, this chart displays the income tax rate that was applicable in 2010 (and, now, in 2011) and how much your income tax rate would have gone up if the lower tax rates had not been extended:

Current 2010 Tax Rate:                                  2011 Tax Rate if Bush Tax Cuts Expire:
10%                                                                           15%
15%                                                                           28%
25%                                                                           31%
28%                                                                           36%
33% & 35%                                                              39.6%

The good news, according to OPM is this:

“The 2011 income tax withholding amounts have now been applied and will affect your February 1, 2011, payment and all subsequent payments in 2011. You will receive a Notice of Annuity Adjustment in late January 2011 describing the February 1, 2011, payment, including information about any new income tax amount withheld from your annuity.”

The tax rates did not change because Congress decided near the end of the year to keep existing tax rates in place but the withholding tables had already been changed in anticipation of higher tax rates going into effect.

Keep in mind that the amount withheld from your annuity could also change for other reasons including:

1. Your annuity amount changed.

2. The withholding tables changed.

3. You asked OPM to make a change.

Making Work Pay Tax Credit

In addition, the American Recovery and Reinvestment Act of 2009 (the Stimulus Plan) included a provision for the reduction of Federal Income Tax withholding for many employees during 2009 and 2010. Called the “Making Work Pay,” tax credit, it included a 6.2 percent reduction of Federal Income Tax withholding. This is not in effect in 2011 and it could have impacted the amount of money withheld from your check as well.

Some readers may have had less money taken out of their regular checks as a result of this provision which has now expired. The result: less money in your check.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47