Sunday, April 20, 2008

Parents' Income Revisited

Thank you Mr Tomkiel for the answers. You did not answer my second question about parents receiving a reduced social security benefit , probably because I phrased it incorrectly. I understand that 85% of their social security income is taxed because of the higher AGI. My question is about the reduced social security benefit they receive every month - the checks are less - apparently because their total income (AGI) last year exceeded some trigger.
Mary Anne from Nevada

Sorry about that! The higher income does NOT affect the SS benefits under Title II (the regular SS benefits based on someone's earnings record).

But income does affect SSI payments if they receive them. It's possible to receive both kinds, and both are paid by SSA, so its easy (and common) to confuse them.

SSI payments are based on need, so income and assets are considered. Because a house may be excluded from countable assets for SSI purposes, the proceeds from the sale may now disqualify them for such payments if that is what they have been getting.

Or they may have elected to have taxes withheld from their SS benefits.

Ordinarily, whenever there is a change in benefit payments SSA will send a letter to explain the change. The letter might come some time after the change.

Full Retirement Age- Later Earnings

If a worker has reached full retirement age and is receiving benefits and continues to earn income, is social security deducted from those post-retirement-age earnings?

Paul from Washington State

Yes. The SS or FICA tax (they call it a "contribution" but try telling IRS you can't afford to make a contribution right now!) apPublish Postplies to all earned income in covered employment.

But if the earnings in a post-retirement year are higher than one of the year's earnings used to calculate the original benefit, SSA will re-calculate the benefit amount and any increase will be paid for years after the latest higher earnings year.

You can expedite that by bringing your w2 to the SSA office as soon as you get it and ask for a manual recomputation. They will do it automatically anyway, but it could be quite a while.

Rental Income

One of my clients, a 70 year old male, questioned me whether or not Rental Income is counted towards the taxation/witholding on their social security benefit payments. In reading section 806 I also noticed interest and dividend income may not count towards my clients' benefits. Would I be correct to say that only "Earned Income" is countable towards the reduction of SS income benefit?

Shawn from Pennsylvania

If you are talking about the taxation of benefits, no, because even unearned income is considered by the IRS to determine whether SS benefits are to be taxed. Section 806 of the Social Security Benefits Handbook discusses earnings that are not counted for the Earnings Test that SSA uses to reduce benefits if the earnings are over the exempt amounts. But this Earnings Test does not even apply to anyone over Full Retirement Age, such as your client.

Parents' Income Causes Taxation of Benefits

My parents are 86 and 92. Recently they sold assets to pay for medical expenses and that capital gain boosted their AGI on their tax form to high amounts. Their social security benefits appear to have been reduced because of their high AGI. Is that the case?

Many thanks
Mary Anne from Nevada

Yes. The AGI figure includes the capital gain, so 85% of the SS benefits are taxed if their joint return is over $32,000.

Husband's Gov't Pension

First, thank you for your book, for its education, contribution, and triggering the questions we have.

My husband is in a second career with the state and will receive a state pension after 10 years there. In his prior career in private industry, he contributed to the social security system for over 30 years at the amount that allows him to receive full social security benefits at age 66 as well as full state pension. Will my social security benefit from him, or my own earned social security benefit be reduced because of the state benefit?

Many thanks
Mary Anne from Nevada

No. What you are worried about is the Government Pension Offset. But this only applies to a Spouse's benefit where the spouse is entitled to the government pension. The worker can receive both public and private pensions. Because you didn't work in public employment, your SS benefits are not affected.

If your husband collects a spouse's benefit on your account, then that benefit would be subject to the offset. But if he worked 30 years, it's unlikely that he would qualify for a spouse's benefit on your account, because his primary insurance amount would have to be less than 50% of yours.

Self-Employment Non-Service Months- for Earnings Limits

Some Background:
Bob from NY previously asked about his recently widowed daughter who works less than 45 hours in self-employment. He said per week, but wrote back to say she actually is working less than 45 hours per month. This makes a big difference because the general rule is that a self-employed person who puts in less than 45 hours per month is able to use that month as a "non-service" month for the earnings test. If so, then the beneficiary can receive a benefit for such a month despite the annual earnings.

Bob also wrote back to ask what procedure to follow to get the benefits, so here it goes.

The first thing to understand is that SSA considers any claim by a self-employed person to be questionable because a business owner can control the reporting of income. The other thing is that the actual dollar amount earned is not a conclusive factor in deciding if someone is renedering substantial services. The reader would do well to read a couple of sections of my Social Security Benefits Handbook: Section 412 and Section 809. These sections provide more detail about how SSA handles these self-employment claims.

So Bob, your daughter must be prepared for some probing and detailed questions about her business and what she is doing, and what she is not doing. She should also know that SSA will verify her statements by contacting vendors, customers and may even come by the business to do a little spying! Yes, that's exactly right.

Your daughter must visit the SS office and put in an earnings report. If she hasn't filed an application for Mother's benefits she should do so. Because she is self-employed she must make a visit in person to the SSA office.

Note that non-service months are available only in the first year of entitlement.

SSA's Programs Operations Manual System (the POMS) discusses the rules for determining whether self-employment services are sunstantial. Here is the link:

Saturday, April 12, 2008

SSI & SSD & Plentiful Income

Is it possible to terminate SSDI and SSI(dual recipient) and Medicare and Medicaid(dual recipient) benefits voluntarily? ...For instance if you know new plentiful income (well over $900 set by SSA) is to start for yourself sometime in the future? What is the process and procedure? Especially if you want to time the ending of benefits and the begining of new income?

Thank You

Nightend from Mass.

OK- we have several questions here: Let’s start with SSDI. This stands for Social Security Disability Insurance. This program is not based on financial need, but rather is based on SS covered earnings, and the monthly benefits are determined by the earnings record of the beneficiary. After 24 months of entitlement to benefits a beneficiary is eligible for Medicare, which is totally different from Medicaid, a welfare-based medical coverage, which we’ll talk about in a minute.

NOTE: If the income you will receive is from something other than earnings, it will have no effect at all on your SSDI, and no effect of your Medicare entitlement. If the income is earned, from wages or self-employment, then it will result in a termination of your SSDI benefits ONLY if it substantial. For wages in 2008, this means over $940 per month ($1,570 if you’re blind). There are special rules for the self-employed, (Section 504 of the Social Security Benefits Handbook).

Even at that, you may be eligible for a Trial Work Period before SSA determines you are no longer disabled, whereby you can work for 9 months (they don’t have to be consecutive – but they only count if within a 60 month rolling period- see Section 509 of the Social Security Benefits Handbook for a discussion of the Trial Work Period). If so, they will not terminate your benefits until the third month after that, so it is possible to receive up to 12 months of benefits after you return to work. If you are not medically recovered, but your benefits terminate only because you are working, you may continue to be covered by Medicare for another 8 ½ years after you start working.

The rules are totally different for SSI. Because it is a needs-based welfare program, income from any source, earned or unearned, offsets your payments and affects eligibility for Medicaid. However, if your are still disabled, you may be eligible for Medicaid continuation under the Ticket To Work Program. Here’s a link for that: Medicaid Ticket To Work Program

The timing for this is within your control simply by deciding when you want to begin working, if that is the source of your new income. Once you begin receiving income, you must report it to SSA and the state agency that provides your Medicaid coverage, like the Department of Social Services.

Substantial Services in Self-Employment

My daughter was recently widowed. She has 2 young children. In her discussion with Social Security, she asked about relief from the earning limit on her survivor's benefit because she works less than 45 hours per week. The Social Security interviewer told her that the "substantial services" rule, which you discuss in Section 804, is only applicable to disability cases, not survivors. Is that correct?

Bob from NY State

I’m sorry to hear about your daughter’s loss. The “substantial services” 45 hours rule for self-employment is per month, not per week. This rule applies in survivors and retirement claims, and only for self-employed persons. So although the SS worker was wrong, it won't seem to help your daughter, unless you meant "month" rather than "week."

If you need the citation to the POMS (SSA’s operating rules) it is RS 02505.65- “Meaning of Substantial Services in Self-Employment.

The substantial services rules for disability cases are much more complex, because they serve a different purpose, i.e. determing if someone is disabled.

Deferred Benefit strategies

Facts: Husband age 63, born 1945.
Wife age 61, born 1947. Husband will wait till full retirement age of 66 to collect S.S.
Husband and wife have stopped working, drawing on IRA money for now.
Husband and wife have worked since the 60’s, both qualify for S.S. benefits. Wife's S.S. earnings and S.S. taxes equal about 80% of husband’s.

In order to NOT leave any S.S. benefits on the table, so to speak, what would the best scenario be for wife to start receiving benefits, at what age? We are looking to maximize combined benefits as a couple.

If wife collects at age 62 at a reduced level, (husband would be 64 and has chosen to wait to 66) and then qualify for spouse benefits (one half of husband’s) when husband is 66, would this maximize our combined benefits? However, wife's OWN record benefits would probably be around 80% of husband's, thus greater than spouse benefits of one half. Husband and wife both assume to live at least to break-even age of around 80, thus it may make sense for both (if taken individually) to wait to age 66 to collect 100%, unless there is a scenario to start wife's benefits between 62 and 66?

Thank you for your help; I hope to hear from you.
Norm from Mass.

The only sure way to not “leave any ss benefits” on the table, as you put it, is to collect them before you die. If you do not need the income, then you can bank the benefits and earn interest. If you die before collecting, those benefits are gone for good.

When you consider the idea of not taking a reduced benefit to wait and get the unreduced benefit, a "deferred benefit strategy", you must calculate the costs, i.e. the loss of the benefits you defer to collect a higher amount later, and then figure out how long it will take at the higher rate to recover the loss up front.

Please note that your idea of your wife taking her own reduced benefits and then switching to a reduced wife’s benefit when you turn 66 won’t work, because the regulations don’t allow that. Because your wife’s benefit is 80% of yours, she will not qualify as a wife when you decide to become entitled, because her primary insurance amount is greater than 50% of yours. The only time a spouse can elect between her own benefit or her husband’s is if she is of full retirement age. Same holds true for husbands.

You can elect to take spouse’s benefits instead of your own only when you are at full retirement age (66 for you), not before.

However, if you are not planning to collect till age 66, you have an option that will reduce the break-even age for you. You could take a spouse’s benefit on your wife’s account then, defer entitlement on your account till age 70, drop the spouse benefits, then get your own benefit with the Delayed Retirement Credit, which would add another 32% to your benefit amount.

Of course you still run the always present risk of dying before you reach 70, and the further risk of dying before you recover back the deferred benefits. That's why I would never reccomend this type of strategy.

With that warning, let’s look at an example. If your benefit is $2,000 unreduced, and your wife’s unreduced is $1,600, you could collect $800/month at age 66. That would be $1,200/mo. less than if you took your own benefit. For the 48 months between 66-70, that’s $57,600. If you then take your own benefit at 70, the Delayed Retirement Credit would add $640 per month. Of course, these are just sample figures and don’t take into account any COLA’s that would occur, nor any interest you may have earned if you banked the money instead of deferring it. Anyway, just using these straight-line figures, it would take you till age 77.5 to make back the deferred benefits (57,600 divided by 640 = 90 months = 7.5 years after age 70).

In my opinion, life is so fleeting that any strategy of deferred benefits is risky. Although the risk is somewhat lessened in your case because you can elect the unreduced spouse benefit at 66, so you are not deferring the entire amount of your benefit. But still, $57,600 is a lot of money, and 7.5 years after age 70 is a long way off. And that's just to get the money back. You only get the advantage (at $640/mo.) for as long as you live (or your wife if she survives you via the widow's benefit which will be what you were receiving). Who can predict these things?

Remember the old saying: a bird in hand is worth two in the bush! And the famous Wimpy (of Popeye fame) plea: "I will gladly pay you Tuesday for a hamburger today!"

If you take the higher benefits now, you will pay later - much later - by reason of a benefit not being as high as it might otherwise be. If later doesn't come for you (or your widow), you never pay.