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Key developments in the world of federal employee benefits: health, pay, and much more.

Tax Trouble

The federal income tax withholding formula can be complicated, and employees both inside and outside the government workforce this year will feel the effect of several changing tax provisions.

The Making Work Pay annual tax credit, included in the 2009 American Recovery and Reinvestment Act, expired on Dec. 31, 2010, meaning federal employees could see less money in their paychecks. The credit was equal to 6.2 percent of a taxpayer's earned income, up to $400 for single filers and $800 for married couples, though it began to phase out once individuals earned more than $75,000 annually and couples earned more than $150,000.

"Everything turns around this year," said Michael O'Toole, senior director of publications and government relations at the American Payroll Association. "Employees will see federal withholding go back up. They may be surprised to see an increase in withholding."

Some workers might have to adjust the amount withheld in every paycheck as a result. For example, married employees filing jointly could have increased their withholding last year if they weren't eligible for the credit and didn't want to be caught paying additional money at the end of the year.

"This year there's no credit, so what they're going to end up with is withholding too much and getting a refund," O'Toole said. "They can knock off extra withholding to bring it back to the middle."

Some of the increase in federal withholding could be offset by a drop in the amount of Social Security tax taken out of their paychecks, said David Snell, director of retirement benefits services for the National Active and Retired Federal Employees Association. Legislation passed in December reduced the Social Security tax rate by 2 percent, meaning employees will pay only 4.2 percent on the first $106,800 of their income. That change won't affect retirees, however.

Snell advises federal workers and annuitants to use the calculator tool on the Office of Personnel Management's website to make sure enough money is being withheld so they won't owe additional taxes at the end of the year.

According to O'Toole, another change that could affect federal workers is the end of the Advance Earned Income Tax Credit, which applied to low-wage employees with children. Those workers could get payments during the year of about 60 percent of their total eligibility. Employees still can get the credit, but they will have to file for it at the end of the year rather than receive advance payments, he said.

For retirees wondering why their Feb. 1 annuity check was different from the January payout, it's because OPM did not receive the 2011 withholding rates from the Internal Revenue Service in time to apply them to the Jan. 3 payment. The correct rates will apply to all remaining 2011 payments. According to OPM, the amount withheld from retirement checks could increase or decrease due to changes in withholding tables or annuity amounts.

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