Stan,
I salute you for understanding this stuff. Thanks for the response. I'm still having some trouble understanding it, but I know if I read it enough times it has got to click. Sometimes I'm a little slow on the uptake.
Tony from Tennessee
Tony,
Thanks. I know how you feel. It always takes time for new and complex concepts to sink in. Once you get the big picture and the basic concepts down, it all comes together. In your question you spoke about getting the "penalty" back. The "penalty" is actually 2 things: the reduction factor used to calculate the benefit amount for months before Full Retirement Age (FRA), and then the witholding of benefits required to satisfy the annual earnings test applicable to those under FRA. The witheld benefits are not paid back, but the reduction factor is re-adjusted at FRA.
Hope this helps a bit. You are not alone in having some difficulty in grasping all this right away. Feel free to send follow up questions if something is unclear.
Saturday, May 10, 2008
Tuesday, May 6, 2008
Adjustment of Reduction Factors at Full Retirement Age
QUESTION:
Enjoyed your online book very much. Talk about easy to read!
I will turn 62 at year end, and plan on continuing work and applying for benifits. Based on my expected income, I will probably be penalized approximatly $8900 annually. I don't know where I got this idea, but somewhere I thought I read that this penalty eventually comes back to the recipent after full retirement age is reached (66 in my case). Could not find a reference to this in your book. Am I correct in this?
Thanks in advance, and thanks for the excellent work in this book.
Regards,
Tony from Tennessee
ANSWER:
Thanks for the compliment, flattery gets you everywhere!
Sorry, but the "penalty" you refer to does not come back to you. That's the bad news. The good news (and what you were probably thinking about) is that the number of reduction months used to figure your benefit amount before Full Retirement Age gets readjusted when you reach 66 to exclude any months which were used to withold benefits for the "penalty." They call this an "ARF" (one of the more memorable acronyms).
The benefit amount before Full Retirement Age is reduced by a fraction for each month under 66 as of when you first become entitled. The legal reduction factor is 5/9 of 1% of the primary insurance amount for each month of the first 36 months and for each month more than 36 months the factor is 5/12 of 1 percent.
If you start benefits at 62, that would be 48 months of reduction. That comes to 25% off the full benefit. If you have excess earnings that require witholding of some monthly benefits (the "penalty" you referred to), then the months come out of the reduction at age 66. So for example if at age 66 it turns out that you only received 36 full monthly benefits, then the reduction factor is readjusted to only a 20% reduction, for all benefits beginning with the month you reach Full Retirement Age. This is done automatically without you having to make any application for this readjustment.
Enjoyed your online book very much. Talk about easy to read!
I will turn 62 at year end, and plan on continuing work and applying for benifits. Based on my expected income, I will probably be penalized approximatly $8900 annually. I don't know where I got this idea, but somewhere I thought I read that this penalty eventually comes back to the recipent after full retirement age is reached (66 in my case). Could not find a reference to this in your book. Am I correct in this?
Thanks in advance, and thanks for the excellent work in this book.
Regards,
Tony from Tennessee
ANSWER:
Thanks for the compliment, flattery gets you everywhere!
Sorry, but the "penalty" you refer to does not come back to you. That's the bad news. The good news (and what you were probably thinking about) is that the number of reduction months used to figure your benefit amount before Full Retirement Age gets readjusted when you reach 66 to exclude any months which were used to withold benefits for the "penalty." They call this an "ARF" (one of the more memorable acronyms).
The benefit amount before Full Retirement Age is reduced by a fraction for each month under 66 as of when you first become entitled. The legal reduction factor is 5/9 of 1% of the primary insurance amount for each month of the first 36 months and for each month more than 36 months the factor is 5/12 of 1 percent.
If you start benefits at 62, that would be 48 months of reduction. That comes to 25% off the full benefit. If you have excess earnings that require witholding of some monthly benefits (the "penalty" you referred to), then the months come out of the reduction at age 66. So for example if at age 66 it turns out that you only received 36 full monthly benefits, then the reduction factor is readjusted to only a 20% reduction, for all benefits beginning with the month you reach Full Retirement Age. This is done automatically without you having to make any application for this readjustment.
Friday, May 2, 2008
Voluntary Suspension & Spouse Benefits
QUESTION:
If the worker properly applies for Social Security benefits but "files and suspends" to age 70, the worker is therefore nevertheless "entitled." Can the spouse (at her FRE or at any other time before the worker turns 70) then file for a spousal benefit, even though the worker is not at that time receiving cash benefits? Assume the spouse has not applied for benefits based on her own record, and that if she did the benefit would be low, say 20% of the worker's benefit? Thanks.
Sam from DC
ANSWER:
A spouse can receive benefits on the worker's account even if the worker suspends benefits to collect the Delayed Retirement Credits at age 70. Under this suspension procedure, only the worker's benefits can be suspended, not any of the beneficiaries on the account. There is no advantage for them anyway, because it is only if the worker's benefits are not paid that the Delayed Retirement Credit applies. If the spouse's benefits are only 20% of the worker's, then the benefit payment will never be greater than the spouse's benefit rate of 50%, or even at the maximum reduced spouse rate (35%) if she is under Full Retirement Age.
If the worker properly applies for Social Security benefits but "files and suspends" to age 70, the worker is therefore nevertheless "entitled." Can the spouse (at her FRE or at any other time before the worker turns 70) then file for a spousal benefit, even though the worker is not at that time receiving cash benefits? Assume the spouse has not applied for benefits based on her own record, and that if she did the benefit would be low, say 20% of the worker's benefit? Thanks.
Sam from DC
ANSWER:
A spouse can receive benefits on the worker's account even if the worker suspends benefits to collect the Delayed Retirement Credits at age 70. Under this suspension procedure, only the worker's benefits can be suspended, not any of the beneficiaries on the account. There is no advantage for them anyway, because it is only if the worker's benefits are not paid that the Delayed Retirement Credit applies. If the spouse's benefits are only 20% of the worker's, then the benefit payment will never be greater than the spouse's benefit rate of 50%, or even at the maximum reduced spouse rate (35%) if she is under Full Retirement Age.
Sunday, April 20, 2008
Parents' Income Revisited
QUESTION:
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.
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
ANSWER:
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.
ANSWER:
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
QUESTION:
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
ANSWER:
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.
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
ANSWER:
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
QUESTION:
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
ANSWER:
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.
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
ANSWER:
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
QUESTION:
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
ANSWER:
Yes. The AGI figure includes the capital gain, so 85% of the SS benefits are taxed if their joint return is over $32,000.
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
ANSWER:
Yes. The AGI figure includes the capital gain, so 85% of the SS benefits are taxed if their joint return is over $32,000.
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