Lesson 10: Social Security Flashcards
Social Security
To qualify for Social Security retirement benefits, a person must be fully insured
Have accrued 40 quarters of coverage
- To earn 1 quarter of coverage, a person must earn at least $1,410 in that year (for 2020)
- If that threshold is reached at any time during the year, that person will be credited with at least 1 quarter of coverage.
- Maximum accrual of 4 quarters per year
-Or, to be currently insured for Survivor’s Benefits
6 quarters of coverage out of the previous 13 quarters
Qualifying for SS benefits
1) Can be fully insured - need 40 credits, can earn 4 per year…10 years
2) Currently Insured - usually not old enough to be fully but if you earn 6 credits out of previous 13 quarters ending in quarter in which death would occur
3) Disability (most difficult) - worker must be fully insured and must have had a minimum amount of work in recent period (recency requirement)…varies by age of disabled worker
Paying for Social Security
Social Security and Medicare are funded by payroll taxes (also referred to as employment taxes) and, more recently, by a tax on the unearned income of high earners
FICA Taxes: They total 7.65% on up to the first $137,700 (2020) of an employed person’s payroll. Earnings above $137,700 (2020) are only subject to the Medicare tax of 1.45%
Programs and Funding Source:
SS Retirement Benefit: 5.3% of payroll
DI Benefit: 0.9% of payroll
Hospital Insurance (Medicare Part A): 1.45% of payroll
Supplemental Medical Insurance (Medicare parts B and D): Funded by general tax revenue
3.8% Medicare Tax: In addition to the 1.45% tax on all compensation for Medicare Part A, an additional 3.8% tax (also referred to as the Net Investment Income Tax- NIIT)…applies to the LESSER of
Net Investment Income: portfolio income, income from passive activities, gains on disposition of property, but doesn’t include qual. plan distributions
Modified Adjusted Gross Income (MAGI) over these threshold:
MFJ -250k
MFS-125k
Single-200k
High Income Medicare Tax: another Medicare tax equal to 0.9% applies to wages in excess of:
MFJ $250,000
MFS $125,000
Single $200,000
-paid by employees, not employers and applies to wages, compensation or self-employment income
-calc separately…ex 130k wages, 145k self emp. income…single filer…130k does not go over threshold, for self emp income threshold is reduced by 130k…now is 70k so will have to pay the tax on 75k
Self Employment Tax Calculation: (FICA is only for employees…they pay 7.65% on payroll, employers usually match this)…self employed have to pay both sides, can deduct this from gross income.
A=92.35% x self employ income
12.4% x A (up to 137,700) plus 2.9% x A
-Self-employed income in excess of thresholds is also subject to the Additional Medicare Tax of 0.9%
SS Challenges
Demographics: Aging population increase in outflows, creating a mismatch with incoming payroll taxes.
Longevity: As people live longer, benefits must be paid for a longer period of time
Payroll Taxes: Social Security, compared with Medicare, has a wage cap for taxes. On occasions, such as the Great Recession, payroll taxes have been reduced.
SS Examples:
The formulas used for Social Security, though complex, are known, and benefits can be estimated. The challenge, however, is that John and Katy may not know what they will be making for income in the future, and that could affect their estimates. A growing concern is that the population is aging rapidly, and because of this, it is correct that there will be financing shortfalls
These are true:
A. A worker may accrue up to four quarters of coverage per year.
B. Earning a designated amount of money, regardless of when it was earned during the year, will credit the worker with a quarter of coverage for that year.
C. A worker must have worked in six of the previous 13 quarters to qualify for survivor benefits.
A worker must earn 40 quarters of coverage to be fully insured. (not 10 quarters as listed in question)
A worker earns one quarter of coverage for each $1,410 in earnings, up to a maximum of 4 quarters of coverage for the year. Since 1978, it is not necessary that the worker have earnings in each quarter – annual income of 4 times the quarterly limit will attain 4 quarters of coverage for the year.
Computing Social Security Benefits
Full Retirement Age: Age at which worker can retire and receive non-reduced benefits equal to their primary insurance amount (PIA)
*This age goes from 66-67 based on your year of birth
Min age is 62 (majority of ppl take at 62)
*Can delay until age 70, each year you wait you increase your benefit for life by 8% a year
Earnings Test: SS under normal retirement age is reduced if wages exceed a specified amount
PIA: monthly amount a worker will receive under SS if retire FRA or become disabled..it is.the amount which all SS benefits are based.
Calculating SS
- each person receives a benefit that corresponds to how much they paid in over their working lifetime. The process for calculating one’s Social Security retirement benefit is:
1. Calculate the worker’s Average Indexed Monthly Earnings (AIME): identify each prior year’s wages up to the maximum subject to Social Security taxes. For example, in 2020 only the first $137,700 would be counted…convert actual earnings received after age 21 to current dollars using an indexing factor…sum the highest 35 years…divide by 420 months
- Calculate the worker’s Primary Insurance Amount (PIA)….AIME is split into 3 tiers:
Tier 1: the first $960 (receive 90% of tier 1)
Tier 2: earnings between 960-5785 (receive 32%)
Tier 3: earnings over 5785 (receive 15%)
Max poss. PIA is $3,011 - Calculate the worker’s actual monthly benefit based on when they begin taking Social Security relative to their full retirement age.
- Reduce that monthly benefit by a portion of any earned income, if applicable.
if you file to receive SS at FRA - get full PIA
eligible bene of worker may receive usually 50% of PIA
Early or Delayed Retirement
Early Retirement: (earliest is 62) will result in perm. reduced benefit
5/9th of 1% (i.e., 1/180th) for each month of early retirement up to 36 months early
5/12th of 1% (i.e., 1/240th) for each month of early retirement greater than 36 months up to 24 months
Delayed Retirement: (as late as 70) will perm. increase benefit
Increases the benefit by 3% to 8% for each year of delayed retirement to age 70
Based on full retirement age
8% per year for those born on or after 1943
*Note that the 8% increase per year is not compounded.
taking benefits as early as possible will result in a permanent loss of 30% of monthly benefits based on 67 FRA
late as possible will result in a permanent gain of 24% of monthly benefits (8% per year)
Filing strategies are complex and depend on age, income, assets, taxes, and other perceptions on life expectancy and solvency of Social Security.
Retirement Earnings Limitation Test
- benefits are reduced for early-retirees who have earnings (earned income) from continued employment
- considered earned income: wages, share of partnership income, sched. c income
- not considered: cap gains, pension, passive rental, investment
Depends When income earned:
Before FRA: reduced $1 for every $2 earnings above $18,240
Year of FRA: reduced $1 for every $3 earnings above $48,600 - only for months before reaching FRA
After FRA: no reduction
¹⁄₁₈₀ of a percent each month rule applies to delaying until full retirement age, not after full retirement age
The benefit is reduced by 5/9 of one percent for each month prior to the full Social Security retirement age
Taxation of Benefits
-Have to add back certain items to Modified Adjusted Gross Income (MAGI):
Excluded municipal bond interest
Excluded foreign earned income and housing allowances
Excluded U.S. Savings Bond Interest
Excluded adoption assistance benefits
Deducted student loan interest expense
Excluded income from Guam, American Samoa, the Northern Marianna Islands, and Puerto Rico
MFJ: MAGI below 32k, no SS included in gross income
MAGI between 32k and 44k, 50% benefit included in gross income
MAGI above 44k, 85% benefit taxed
(range for single is 25k - 34k)
50% inclusion and base amount
If MAGI plus one-half of Social Security benefits exceeds the relevant base amount, but not the adjusted base amount, then the amount of benefits included in gross income is the lesser of:
50% of Social Security benefits
or
50% x [MAGI + (50% x Social Security benefits) – base amount]
85% inclusion and adjusted base amount
If MAGI plus one-half of Social Security benefits exceeds the adjusted base amount, the amount of benefits included in gross income is the lesser of:
(1) 85% of Social Security benefits
or
(2) 85% x [MAGI + (50% x Social Security benefits) – adjusted base amount]
+
Lesser of: Amount included from “50% formulas”
or
$4,500 ($6,000 for married filing jointly; $0 for married filing separately)
SS Taxation Example
All True
A. A retiree whose only income is his Social Security benefit will not pay any taxes on those benefits.
B. A retiree with substantial income in addition to his Social Security benefit may pay taxes on as much as 85 percent of his Social Security benefit.
C. Nontaxable interest and income earned in a foreign country are both added to adjusted gross income when determining whether or not Social Security benefits are subject to tax.
*Social Security benefits are subject to their own tax rules that are distinct from those for earned income.
Additional Benefits
*Look at slides
Medicare Definition
Medicare is a federal health plan designed for:
People 65 and older
Disabled individuals
Individuals with permanent kidney failure
If a worker applies for retirement benefits before age 65 there is no need to file a separate application or Medicare
