Advanced Underwriting Consultants

Ask the Experts – February 19

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I have a client, age 62, with a Social Security primary insurance amount (PIA) of $500. Her husband’s PIA is $3,000. Can the wife take her own reduced benefit now, and then file for her spousal benefits at full retirement age? Would she be entitled to a $1,500 spousal benefit?

Answer: If her husband has already filed for his own Social Security retirement benefits, then she may not delay receiving spousal benefits. Therefore, she would receive a reduced retirement benefit of $375 ($500 reduced by 25%) plus a reduced spousal benefit of $750 ($1,500 less $500—i.e. $1,000—reduced by 25%). Her overall benefit in this scenario is $1,125.

If her husband has yet to file, she can begin receiving her own benefits now and delay receiving spousal benefits until she reaches full retirement age. This will allow her to avoid reduced spousal benefits.

However, even if she delays receiving spousal benefits until age 66, she will not be entitled to a $1,500 benefit. She will still receive her own reduced retirement benefit of $375. Her spousal benefit will not be reduced, remaining at $1,000 (half of her husband’s $3,000 PIA less her $500 PIA). Overall, her combined Social Security benefit in this scenario is $1,375.

If the wife files for her own benefits before her husband, she can—but is not required to—file for spousal benefits as soon as her husband files. However, she may want to postpone filing for spousal benefits if she hasn’t yet reached full retirement age since the spousal benefit would be reduced.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Ask the Experts – October 14

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client is 63 and has begun receiving his Social Security benefit of about $1,600 per month. The problem is that he still works and earns about $45,000 per year. When, and by how much, will his benefits be reduced?

Answer:  Generally, if a retiree has reached her full retirement age (FRA), then his SS benefits will not be affected by his earnings. However, his benefits will be reduced if his earnings exceed certain limits before reaching FRA.

If a retiree has not yet reached FRA, he can earn only $15,120 in gross wages (i.e. pre-taxed income) in 2013 and not lose any benefits. His benefits will be reduced by $1 for every $2 earned above this amount.

The retiree is responsible for reporting his earnings if they affect the payment of his benefits. He may be subject to penalties if he filed late and if it resulted in an overpayment of benefits.

If the retiree earns more than the yearly exempt amount, Social Security will withhold full monthly benefits until the entire amount that is required to be withheld has been withheld. However, he may request that the withheld benefits be pro-rated over the course of the year.

Here’s how the rules would apply to your client’s situation. Let’s say he earns exactly $30,000 more than the yearly earnings limit. His SS benefit for this year will be reduced by $15,000. The SSA will withhold his entire SS benefits from January through September—for a total of $14,400. In October, the SSA will reduce his check by $600, and pay him $1,000 for that month. He will receive his full $1,600 benefit for the months of November and December.

If he forgot to report his anticipated income, he will be required to pay any over payment received back to the SSA and subject to penalties.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Question of the Day – May 25

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Will an employee’s deferral contributions to a 403b plan reduce her potential Social Security retirement income?

Answer: No.

While employee deferral contributions are not generally subject to income taxes, they are subject to Social Security taxes.  Employer contributions are not subject to Social Security taxes.

Since deferrals are subject to FICA taxes, they are part of the taxpayer’s Social Security wage base upon which retirement benefits are based.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – March 23

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I have a client who just turned 64 who will retire later this year, and begin collecting Social Security retirement benefits.  Will her income early in the year reduce her benefits later in the year?

Answer: No.  While earned income has the potential to reduce Social Security retirement benefits for early retirees (those younger than 66 under current rules), only income earned in months after Social Security benefits have started is counted.

Here’s an excerpt from the Social Security website:

Sometimes people who retire in mid-year already have earned more than the yearly earnings limit. That is why there is a special rule that applies to earnings for one year, usually the first year of retirement. Under this rule, you can get a full Social Security check for any whole month you are retired, regardless of your yearly earnings.

In 2012, a person under full retirement age for the entire year is considered retired if monthly earnings are $1,220 or less. For example, John Smith retires at age 62 on October 30, 2012. He will make $45,000 through October.

He takes a part-time job beginning in November earning $500 per month. Although his earnings for the year substantially exceed the 2012 annual limit ($14,640), he will receive a Social Security payment for November and December. This is because his earnings in those months are $1,220 or less, the monthly limit for people younger than full retirement age. If Mr. Smith earns more than $1,220 in either of those months (November or December), he will not receive a benefit for that month. Beginning in 2013, only the yearly limits will apply to him.

In the example above, the client’s early year income will likely make up to 85% of the Social Security benefit income taxable.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

 

Question of the Day – February 14

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a client who is taking early retirement in 2012 at age 63.  The client intends to apply for Social Security retirement benefits later this year.  Will the early year earnings reduce his Social Security benefits?

Answer: No.

The Social Security Administration’s chart for 2012 indicates that a person can earn up to $14,640 in a year without having the early retirement benefit reduced.

If it is the first year of early retirement benefits, and if the benefits are started in a month other than January, the earnings test will apply on a monthly basis for the first year of benefits. For example, a retiree could begin receiving benefits in July after earning $30,000 during the first six months of the year, and nothing thereafter. Benefits would not be reduced, even though total earnings for the year are over the 2012 limit.

Retirement Earnings Test Exempt Amount (under full retirement age) One dollar in benefits will be withheld for every $2 in earnings above the limit.

Note: There is no annual earnings limit for those who continue to work after reaching their normal (66 in 2012) retirement age.  Persons who continue to work after normal retirement age will not suffer a social security benefit reduction, regardless of how much is earned.

$14,640 Per Year

($1,220 Per Month)

In the example, the taxpayer would need to earn $7,320 (6 months times $1,220/month) before benefits would be reduced.

While the taxpayer’s early year earning will not reduce benefits in the example, the existence of substantial taxable income might make up to 85% of social security benefits income taxable.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.