Lately I have heard some rumblings about a new law will increase taxes on military retirement pay starting in March. Well the stories are half true. It is true that the government will be withholding more and that it is going to affect your March check. However, it is not the result of a “new” law and your federal income tax rate is NOT increasing.
The truth is that the increased withholding is the result of the expiration of the “Making Work Pay” credit, which was part of the 2009 Stimulus Package.
So let me make this perfectly clear. There is NO “new” tax on military retirement. The increase is the result of the new IRS tax withholding tables which changed for 2011, meaning about 75 percent of the population is subject to an increase in the amount of federal tax being withheld from their monthly pay - not just retirees. Again - the tax rates did not change; only the withholding tax table changed.
FYI - DFAS doesn't make this stuff up, they use the IRS tax withholding tables to determine the amount to be withheld. For more information concerning the 2011 federal tax withholding tables go to http://www.irs.gov/. See IRS Notice 1036, TABLE 4-MONTHLY Payroll Period.
Here's a tip - If you want to lower your federal tax withholding, you can do so by visiting the Defense Accounting and Finance Service myPay web-portal. You can use the federal tax calculator on the OPM website help you figure out the amount of federal tax you should have withheld.
As the OPM website points out - Changing the amount of your withholding will not reduce your tax liability at the end of the tax year. You may also want to consider contacting your tax advisor.
Be sure to visit the Military.com Tax Center to learn more about filing your 2010 taxes.