Thursday, May 08, 2008

Stealth Provision Denies Tax Rebates to Millions of Retirees

Millions of retirees will not get a tax rebate under the Economic Stimulus Act of 2008.

The Economic Stimulus Payment Calculator at says they will. But fine print hidden in fact sheets and Frequently Asked Questions still being updated tells another story:

If your income is entirely from a state, federal or private pension or annuity, it doesn’t qualify for a rebate under the stimulus law.

Yes, it’s unfair, especially since such pensions and annuities are pretty much taxed in full (except for the small portion that comes from employee contributions that were taxed already).

And maybe the unfairness explains why the government has barely communicated this exclusion—and is not doing so consistently, even today.

But Congress worded the law so that the rebates go only to people who are working or receiving Social Security, Veterans or Railroad Retirement benefits. Those who receive other pensions and annuities get nothing.

I find this distressing on several levels: as a 27-year IRS employee, much of it in management; as a federal retiree whose present income consists entirely of annuities; and as an Enrolled Agent (now authorized to practice before IRS) who has found the Service’s communication of this exclusion woefully deficient.

How did this happen?

Blame goes first to Congress for passing a law that excluded so many retirees. Except for Social Security, Veterans and Railroad Retirement benefits, the
Economic Stimulus Act of 2008 defined “qualifying income” for the tax rebates as “earned income,” as described in Internal Revenue Code Section 32. Like most people—and apparently most members of Congress—I did not rush to the code to see what Section 32 says. In fact, it covers procedures for the Earned Income Credit.

Section 32(c)(2)(A) defines earned income as wages, salaries, tips, and other employee compensation or net earnings from self-employment. In case there was any doubt as to whether this includes retirement income, Section 32(c)(2)(B)ii adds: “no amount received as a pension or annuity shall be taken into account.”

As careless and mindless as Congress in enacting the wording of the act, President Bush signed it into law, leaving it to IRS to implement in the middle of the annual 1040 filing season.

To say that IRS never communicated the retiree exclusion at all would be inaccurate. But IRS should be faulted for not communicating it sooner, more effectively and above all more conspicuously.

It is true that
an IRS fact sheet in February of 2008 included one sentence about the retiree exclusion. But I missed it, and I suspect most readers did, because it was tucked away after several other exclusions that had nothing to do with retirement:

“Dividends, interest and capital gains income is not included when determining qualifying income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment. Also not included in qualifying income are non-veterans or non-Social Security pension income (such as those from Individual Retirement Accounts).”

The section would have communicated the act’s true intent better if the paragraph had been entitled “Earned Income Test” and preceded by a sentence that said only earned income would qualify. But it didn’t.

On March 26th IRS experts conducted a national phone forum on the rebates for taxpayer representatives. It struck me that someone on the conference call alluded to retirement income being excluded, but it was an aside during discussion of another topic, and I thought it was referencing the separate treatment of Social Security and other government-benefit income. IRS missed another opportunity to emphasize a rebate exclusion impacting millions of taxpayers.

Only more recently has IRS begun to address the retiree exclusion directly—and even now is not handling the topic consistently.

Originally, the FAQs at did not mention pension and annuity income. Finally in April, the FAQs were updated to say that pensions and annuities from private employers were not qualifying income for a rebate.

It was not until yesterday that the
Economic Stimulus FAQs were updated again to include state and federal retirees:

Q. Are pension and annuity amounts provided by state, federal or private sector employers considered qualifying income in determining eligibility for the economic stimulus payment?

No, these payments are not included in the legal definition of qualifying income. [Updated 5/7/08]

Yet even now, as observed at the outset, the Economic Stimulus Payment Calculator does not exclude such retirement income. A state, federal or private retiree who dutifully completes all of the boxes is told they are getting a rebate. Clearly the calculator needs to be updated with the same last-minute changes as the FAQs.

The way two branches of the federal government have handled the retiree exclusion is embarrassing. Of course, it is also inequitable.

There is no valid reason retirees who pay thousands of dollars annually on their retirement income should not receive the same rebate as wage-earners. It was a slap in their faces to deny them the rebate.

And on top of the financial unfairness, it was a special act of ingratitude to millions of state and federal retirees who served the public decade after decade with under-funded resources, technology and wages.

Congress should reverse this inequity promptly. If not, the excluded retirees should file a class-action lawsuit on the grounds that Congress is not giving all taxpayers equal protection of the law.

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