Advanced Underwriting Consultants

Ask the Experts – July 20, 2015

Question:  If my client receives Social Security survivor benefits from her deceased spouse and then gets re-married, is she still eligible for the survivor benefits?

Answer:  It depends.

If your client re-marries before age 60, she cannot receive survivor benefits as a surviving spouse while married. If, however, remarriage occurs after age 60, the client will continue to qualify for benefits on her deceased spouse’s Social Security record.

If the client re-marries after 60 and stays married long enough to become eligible for spousal benefits, she may be eligible for three types of benefits: one based on the deceased spouse’s record, another based on the new spouse’s record and the third based on her own record. While she may be eligible for three different types of benefits, the Social Security Administration will generally pay ONLY whichever benefit is the highest.

Your client may be able to collect a certain type of benefit now and then switch to a higher benefit later.

Ask the Experts – October 3, 2014

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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: Are there ways to minimize income taxes on Social Security retirement benefits?

Answer: Taxpayers often try to minimize the amount of their Social Security retirement benefits subject to taxation with a number of strategies. Particularly, taxpayers can delay filing for Social Security and use their available retirement accounts or assets in the meantime.

For example, let’s say Maude plans to retire at age 62 and needs $40,000 per year on which to live. Also assume that Maude’s PIA is $2,000 per month, or $24,000 per year.

If Maude files at age 62, she will receive $18,000 per year from Social Security ($24,000 reduced by 25%), and presumably make up the extra $22,000 per year from her tax-deferred retirement accounts. Therefore, the $22,000 is added to her adjusted gross income, and her provisional income is $31,000 ($22,000 AGI + ½ of $18,000 Social Security benefits). Since Maude’s provisional income exceeds $25,000, she includes $3,000 of her Social Security benefits in her gross income (i.e. half of the excess of $31,000 provisional income over $25,000 base amount).

Let’s say Maude files at age 70 instead, where she would earn delayed retirement credits at 8% of her PIA per year. In this case, her benefit would be $31,680 per year, requiring her to take out only $8,320 per year from her personal retirement accounts. Her provisional income in this situation is $24,160 ($8,320 AGI + ½ of $31,680 Social Security benefits); therefore, no portion of her Social Security retirement benefits would be taxable.

We’ve purposefully used elementary examples to show how delaying Social Security while using other means until filing for benefits can help avoid taxes on one’s Social Security benefits. We did not take into account the myriad variables that should be taken into account when deciding whether to file for benefits early or later.

Additionally, there are other ways to reduce provisional income. For example,

  • Keep assets inside qualified retirement plans, since distributions from tax-qualified plans are generally added to AGI.
  • Liquidate tax-qualified retirement plans before filing for Social Security benefits.
  • Invest in after-tax retirement plans, such as Roth IRAs or designated Roth qualified accounts.

As usual, the benefits of reducing the amount of Social Security benefits should be weighed against the costs of each of these strategies.

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Ask the Experts – September 25, 2014

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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: Are Social Security benefits subject to income taxes?

Answer: It depends on the taxpayer’s other income. Up to 85% of an individual’s Social Security benefits could be taxable. This doesn’t mean the taxpayer can lose up to 85% of her benefits; it simply means the taxable portion of her benefits may be added to gross income and taxed at her normal tax rates.

The first step in calculating what, if any, portion of a taxpayer’s Social Security retirement benefits are taxable, the taxpayer must calculate her provisional income for the year. Provisional income is generally the sum of:

  • (1)   The individual’s adjusted gross income (AGI);
  • (2)   Her tax-exempt interest (e.g., interest from municipal bonds); and
  • (3)   Half of her Social Security benefits.

For example, if an individual’s AGI is $22,000, and she earns $3,000 of interest from tax-exempt municipal bonds and $14,000 in Social Security benefits, her provisional income is $32,000 ($22,000 AGI + $3,000 tax-exempt interest + ½ of her $14,000 Social Security benefits).

The next step is to compare the individual’s provisional income to the base amount and adjusted base amount. The applicable base amount depends on filing status:

Filing Status Base Amount Adjusted Base Amount
Non-married individual $25,000 $34,000
Married filing jointly $32,000 $44,000
Married filing separately and lived apart during the year $25,000 $32,000
Married filing separately and lived together during the year $0 $0

The base amounts are not indexed for inflation.

If provisional income is less than or equal to the applicable base amount, none of the taxpayer’s Social Security retirement benefits are taxable. If the provisional income is larger than the base amount, a portion of the benefits may be taxable.

For a taxpayer whose provisional income exceeds the applicable base amount, but not the adjusted base amount, she must include in gross income the lesser of:

  • 50% of the excess provisional income over the base amount; or
  • 50% of the Social Security benefits received that year.

For example, suppose Maude, who files as an unmarried taxpayer, had $30,000 provisional income with $12,500 in Social Security retirement benefits. Her provisional income exceeded her base amount by $5,000 ($30,000 provisional income over the $25,000 base amount), which is less than her $12,500 Social Security benefits; therefore she will include half of the excess amount, $2,500, in her gross income for the year. This results in her paying taxes on 20% ($2,500 of her $12,500 yearly benefit) of the benefits she receives.

Additionally, if a taxpayer’s provisional income exceeds the applicable adjusted base amount, 85% of the excess is generally taxable. However, the highest total percentage of Social Security retirement benefits that may be taxable is 85%.

Here’s an example. Say that Maude received a Social Security retirement benefit of $24,000 last year. Also assume she had other income of $30,000 for the year, making her provisional income $42,000 ($30,000 AGI plus ½ of half her $24,000 retirement benefits).

For the first $9,000 of provisional income over the base amount, but less than the adjusted base amount, the tentative amount taxable is $4,500 (50% of $9,000).

For the extra $8,000 of provisional income over the base amount, the tentative amount taxable in this segment is $6,800 (85% of $8,000).

The sum of these two segments is $11,300, meaning she tentatively adds this amount to her gross income. We say these amounts are tentative because she can’t add more than 85% of her total Social Security benefits to gross income. Since 85% of her $24,000 Social Security benefits ($20,400) is more than the tentative amount of $11,300, $11,300 of Maude’s Social Security benefit is taxable.

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Ask the Experts – July 10, 2014

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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: If my client files for early Social Security retirement benefits at age 62, will she receive a reduced survivors benefit if her husband predeceases her?

Answer: No. The fact that your client files early for her own retirement benefits does not affect her potential future survivors benefits. In other words, an individual can file for her own benefits at age 62 and switch to survivor benefits after her spouse’s death after she reaches full retirement age (FRA) without seeing a reduction in survivors benefits.

A surviving spouse generally receives the amount the deceased spouse was receiving from his own Social Security benefits at the time of his death. If the deceased spouse was receiving reduced benefits, the survivors benefit is based on that reduced amount. Conversely, any delayed retirement credits (DRCs) accumulated by the deceased spouse will increase the survivors benefits.

On the other hand, if a surviving spouse files for survivors benefits prior to FRA, her survivors benefits will be reduced; however, filing for her own retirement benefits before FRA has no effect on her survivors benefits.

Here’s an example. Wife’s FRA is 66, and she has earned a primary insurance amount (PIA) of $800 per month. She files for benefits at age 62, receiving $600 per month ($800 PIA reduced by 25% early retirement reduction). Husband’s FRA is 66, and he has earned a primary insurance amount of $2,000 per month. He files for his own benefits at age 70, receiving $2,640 per month ($2,000 PIA increased by 32% DRCs). If the husband dies and the wife has reached FRA, she will be entitled to $2,640 in survivors benefits (replacing her own benefit amount of $600 per month).

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Ask the Experts – June 9, 2014

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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: Can my client file for survivors benefits now, at age 64, and switch to her own retirement benefits later at age 70, earning delayed retirement credits (DRCs)?

Answer: Yes, a surviving spouse may file for survivor benefits at age 64 and switch to her own benefits later.

This allows her to receive her survivor benefits immediately without it adversely affecting her own future retirement benefits, even if she hasn’t yet reached full retirement age. Keep in mind, however, that since she has yet to reach full retirement age (FRA), the survivor benefits would permanently be reduced. But this wouldn’t be much of an issue if she’s planning on switching over to her own retirement benefits at age 70.

This technique allows the surviving spouse access to Social Security funds now—the survivor benefits—while allowing her to continue to earn DRCs, increasing her own Social Security retirement benefits by 8% per year until she reaches age 70.

This technique is similar to the restricted spousal benefit technique, which we discussed here and here. However, to receive spousal benefits now and switch to your own benefits later, the spouse must have already reached FRA, which isn’t a requirement for the survivors switch technique discussed in this entry.

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Ask the Experts – June 6, 2014

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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 will turn 62 this year, and her husband is currently receiving Social Security disability benefits. Can she file for spousal benefits off his disability when she turns 62, and if so, can she switch to her own retirement benefits at age 66?

Answer: She may file for spousal benefits based on her husband’s disability amount starting at age 62, but in doing so, she is deemed to have filed for her own retirement benefits early as well, which will permanently reduce both her own benefits and her spousal benefits.

This is because spousal disability benefits work exactly like normal spousal benefits. That is, the Social Security Administration pays the spouse based on her own record first; but if the spousal benefit is larger than her retirement benefit based on her own record, she will be entitled to a combination of benefits that equals the higher amount.

For example, suppose your client’s husband is receiving $2,000 per month in Social Security disability, and your client herself has earned a $900 monthly benefit at full retirement age based on her own work record.

If she files for spousal benefits now, she will receive a $1,000 monthly benefit, reduced by 25% for filing early, resulting in a $750 benefit. This amount includes $675 from her own retirement benefits ($900 reduced by 25%), and the remaining $75 from spousal benefits ($1,000 less $900, reduced by 25%).

It might be advisable for her to wait until she has reached full retirement age, file for spousal benefits, and defer taking her own benefits until she’s age 70, at which point her own benefits will be $1,188 ($900 increased by 32% for delayed retirement credits).

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Ask the Experts – June 5

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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’ve heard about a Social Security strategy that enables both spouses to draw half of the other spouse’s benefit now, and then each could later collect their own respective higher benefit in the future. How is this possible?

Answer: No, it’s not possible.

Here’s the proposed scenario. Husband and wife have both reached full retirement age (FRA) and both have primary insurance amounts (PIAs) equal to $2,000 per month. Husband files and suspends his own retirement benefit to allow his wife to collect spousal benefits equal to $1,000, half his PIA. Wife also files and suspends, allowing her husband to also collect spousal benefits based on her work record, equal to $1,000 per month. This way, they have a total $2,000 monthly benefit while also accruing delayed retirement credits at 8% per year. At age 70, they each switch to their own retirement benefits, now at $2,640 per month.

This doesn’t work because the SSA has said that only one spouse is permitted to file and suspend his or her retirement benefits. Therefore, in the above example, if the husband files and suspends, the wife cannot. However, she may still access spousal benefits while still accruing DRCs. The only difference is that instead of $2,000 per month from ages 66 to 70, they will receive only $1,000 per month. Both spouses will still have $2,640 benefits by the time they’re both age 70.

This strategy is only available for spouses who have reached FRA, because, as we discussed here, if an individual files for spousal benefits prior to reaching FRA, she is deemed to have filed for her own retirement benefits as well. Both the spousal and her own benefits will be permanently reduced for filing early.

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Ask the Experts – May 12

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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: Is a same-sex spouse entitled to Social Security spousal benefits?

Answer: Yes if the non-working spouse (1) was legally married in a state that permits same-sex marriage, and (2) is domiciled at the time of application, or while the claim is pending a final determination, in a state that recognizes same-sex marriage. The working spouse can be domiciled in a state that doesn’t allow same-sex marriage without affecting the non-working spouse’s claim for spousal benefits.

The SSA rule is slightly different than the IRS rule for recognizing same-sex marriages. In Revenue Ruling 2013-17, the IRS only requires that the same-sex couple be legally married in a state permitting same-sex marriages—it does not require either spouse to be domiciled in a state that recognizes same-sex marriage.

The Social Security Administration requires certain instructions to be followed for evidence of marriage, so visit https://secure.ssa.gov/poms.nsf/lnx/0200210100 for more information. There you can also find which states permit, and which states recognize, same-sex marriages.

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Ask the Experts – May 6

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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: My client is a widow who is about to turn 60 years old. Her deceased husband died prior to filing for his own benefits. When can she file for widow benefits, and will they be reduced if she files before she reaches her full retirement age?

Answer: A widow (or widower) can begin receiving survivors benefits as early as age 60, but she will receive reduced benefits if she files before her full retirement age (FRA).

If the widow files for survivors benefits at age 60, those benefits will be reduced by 28.5%. The benefit reduces linearly with each month she files early, so assuming her full retirement age is 66 years, for each month she files for widow’s benefits early, her benefits are reduced by about 0.396% (28.5% divided by 72 months).

Let’s say her husband had neither filed for his own retirement benefits nor reached FRA at the time of his death. The maximum widow benefit she can receive at her own FRA is equal to her deceased husband’s primary insurance amount (PIA). If his PIA was $2,400, and if she filed for benefits at age 60, she would receive a reduced monthly benefit of $1,716 ($2,400, his PIA, reduced by 28.5%). Alternatively, if she waited until age 64, her monthly benefit would be reduced to $2,172 ($2,400 reduced by 9.5%).

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Ask the Experts – April 29

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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: Can you explain the Social Security Government Pension Offset?

Answer: The Government Pension Offset (GPO) is similar to the Windfall Elimination Provision (WEP) in that it applies to an individual who receives a pension based on her employment with a federal, state, or local government, and who wasn’t required to pay Social Security taxes on such employment. Unlike the WEP, the GPO only applies to Social Security spousal and survivor benefits.

The GPO is much simpler to calculate than the WEP: if applicable, a spouse’s or survivor’s benefits will be reduced by two-thirds of her government pension. For example, if Martha receives a $600 per month civil service pension and is eligible for a $500 per month spousal benefit, because of the GPO, her spousal benefit is reduced by $400 (two-thirds of $600) to $100. If she also receives her own retirement benefits, the WEP might also apply.

Understanding why Congress enacted the GPO might help understand its application. Spousal and survivor benefits were established to compensate spouses who stayed home to raise a family. If the spouse also worked, her benefit is reduced dollar-for-dollar by the amount of her own retirement benefit.

For example, suppose Martha received an $800 monthly Social Security benefit, and her spouse is entitled to a $1,000 monthly benefit. Her spousal benefit of $500 (half of $1,000) is reduced by her own retirement benefit of $800, resulting in no spousal benefit.

If instead she earned a $600 governmental pension and no Social Security retirement benefit, without the GPO, she would still receive the full $500 spousal benefit in addition to her $600 government pension. However, because the GPO applies, her spousal benefit is reduced from $500 per month to $100 per month.

There are a few minor exceptions to the GPO. It does not apply if the employee: Is receiving a government pension that isn’t based on her earnings

    •  Is a federal, state, or local government employee whose government pension is based on employment where she was paying Social Security taxes and either (1) filed for spousal or survivor benefits before April 1, 2004; (2) ended employment before July 1, 2004; or paid Social Security taxes on earnings during the last 60 months of government service;
    •  Is a federal employee who elected to switch from the Civil Service Retirement System to the Federal Employees’ Retirement System after December 31, 1987, and either (1) filed for spousal or survivor benefits before April 1, 2004; (2) ended employment before July 1, 2004; or paid Social Security taxes on earnings during the last 60 months of government service;
    •  Was eligible to receive a government pension before December 1982 and met all the requirements for Social Security spouse’s benefits in effect in January 1977; or
    •  Was eligible to receive a federal, state, or local government pension before July 1, 1983, and was receiving spousal support.

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