Social Security - Work & Taxation

Question 0

How does reaching FRA impact the application of the earnings test?

Answer 0

The test is no longer applied, and earnings are no longer withheld.

Question 1

What is the impact of working for those that have that have already claimed be benefits?

Answer 1

If MAGI based on earned income is $15,120 or higher, and you are less than FRA, SSA will reduce your benefit by $1 for every $2 over the limit.

In the year you reach FRA, but before your birthday, SSA will withhold $1 for every $3 of MAGI based on earned income over the limit of $40,080.

Question 2

How are amounts withheld due to earned income exceeding the earnings test limit, treated once the beneficiary reaches FRA?

Answer 2

Monthly benefits are increased so that the amounts withheld are paid out to the participant over their life expectancy.

Question 3

Why is taking early SS benefits while you are still working a bad idea?

Answer 3

Because part or all of your benefit will be withheld if you earn $15,120. Even though these amounts are returned over your remaining LE, your benefit is still permanently reduced compared to what it would have been if you waited to FRA. If you claim early, you get little or nothing in the way of monthly SS benefits while working, and then get a smaller benefit for the rest of your life. Lastly, if you are near peak earnings, you lose the ability to increase your AIME, which also reduces the size of the benefit you’d have earned if you had simply held off on claiming until FRA.

Question 4

On what measure of income are the following determined:

Taxation of Social Security Benefits

Withholding of Benefits

Answer 4

Provisional Income - Calculate AGI on all non SS income. Add tax exempt interest and Series EE interest and 1/2 of SS benefits.

Question 5

Why does the Earning Test exist?

Answer 5

SS is meant to support those who are retired or disabled. If one is still working, then they are not fully retired. The earnings test helps the SSA to:

Gauge the extent of retirement

Determine the amount to be withheld

Measure work activity of other individuals entitled to benefits on the primary’s record and the amount of any benefits payable to them.

Question 6

When does the higher exempt amount apply?

Answer 6

It applies for the tax year in which the participant reaches FRA. For instance, if you reach FRA on December 31st of 2014, then the higher exempt amount will apply for all earnings in 2014, even before the participant actually turns FRA on the 31st. Same would apply if the same participant reached FRA on any date in 2014. However the Earnings Test ends completely in the month the participant reaches FRA.

Question 7

How are Excess Earnings charged against benefits?

Answer 7

When there are excess earnings, these earnings are charged against and deducted from the benefits. The deductions begin with the first chargeable month of the tax year and continue each month until all the excess earnings have been charged.

E.G. Participants benefit is $500 per month, and they $1,500 of excess earnings, then three months of benefits are withheld, and the regular monthly benefit is paid beginning in month four.

Question 8

How are excess earnings determined?

Answer 8

SSA gets earnings data from W2s and self employed tax returns from the prior year, and uses that data to adjust benefits starting the following year. They may ask the participant for earnings estimates mid year so as too neither under nor over withhold benefits.

Question 9

T or F - the SSA will notify the participant of any adjustments to benefits due to excess earnings.

Answer 9

True

Question 10

T or F - Excess earning are applied against the family maximum.

Answer 10

True

Question 11

T or F - Excess Earnings are calculated based on the beneficiaries W2 and self-employed tax return/1099 (if self-employed) from the prior year.

Answer 11

True. Although, SS may request an earnings update mid-year to avoid under or over withholding of benefits.

Question 12

With regard to taxation of Social Security benefits, what does the term “base amount” refer to?

Answer 12

The base amount is amount of provisional income below which no part of the SS benefits are taxed. Amounts vary by marital and filing status:

Single - $25,000
Married, Filing Jointly - $32,000
Married, Filing Separately - $0 (all benefits are subject to income tax)

Question 13

What are breakpoints for determining the portion of Social Security benefits that are subject to income taxation?

Answer 13

Breakpoints are applied to provisional income

For Singles:

$25,000 or less - No portion of SS benefits are taxed

$25,001 to $34,000 - Lessor of 1.) 50% of SS benefits or (2) 50% of provisional income above $25,000

$34,000 and above - Lesser of (1) 85% of SS benefits or (2) 85% of provisional income above $34,000 plus (a) $4,500 or (b) 50% of SS

Couples, Filing Jointly

$32,000 or less - No portion of SS benefits are taxed

$32,001 to $44,000 - Lessor of 1.) 50% of SS benefits or (2) 50% of provisional income above $32,000

More than $44,000 - Lesser of (1) 85% of SS benefits or (2) 85% of provisional income above $44,000 plus (a) $4,500 or (b) 50% of SS

Question 14

Why are all clients of NFA PFA likely to be taxed on 85% of their SS benefits?

Answer 14

First, the provisional income threshold for taxation at the 85% level is only $44,000. Second, provisional income is based on AGI plus tax exempt interest, and for most retirees, there are not any meaningful above the line adjustments to income.

In 2014, a physician with the maximum allowable SS benefit needs to have only $50,402 of additional retirement income (including tax exempt interest) to reach the threshold necessary to cause taxation of 85% of SS benefit. For a married couple, with a maximum benefit to the breadwinner plus a one half spousal benefit, only $29,805 in additional income is necessary to be subjected to 85% taxation of SS.

Question 15

T or F - Nearly all clients of NFA/PFA will have to pay tax on 85% of their SS benefits

Answer 15

True. In 2014, a physician with the maximum allowable SS benefit needs to have only $50,402 of additional retirement income (including tax exempt interest) to reach the threshold necessary to cause taxation of 85% of SS benefit. For a married couple, with a maximum benefit to the breadwinner plus a one half spousal benefit, only $29,805 in additional income is necessary to be subjected to 85% taxation of SS.

Question 16

How does California tax SS benefits?

Answer 16

SS benefits are fully exempted from state income tax in California.

Question 17

T or F - California taxes SS benefits.

Answer 17

False

Question 18

What percentage of states fully exempt SS benefits from income taxation?

Answer 18

About 50%, including California.

Question 19

What are the excess earning limits for:

Before year of FRA

Year of FRA ( but before birth month)

Answer 19

$1 of every $2 (50%) of annual earnings over $15,480

$1 of every $3 (33%) of annual income over $41,250

Question 20

Which the following count as income for purposes of determining MAGI for the earnings test?

Investment income
Private or government pensions
W2 wages
Muni bond interest
Net earnings from self employment
Capital gains

Answer 20

Only wages (W2) before any employee retirement plan deferrals and net self employment income

All other types of income are excluded

Question 21

T or F - For purposes if the earnings test, income is counted in the year it is earned, not the year it is paid (i.e. Accrual system)

Answer 21

True

Question 22

Case Study - A primary who is still working claims benefits at FRA. His much younger wife is also working (earning about $60K per year) and is caring for their 9 y/o daughter. Who will collect benefits in the family and how will they be impacted by the family maximum?

Answer 22

The primary will get his full retirement benefit, and will not be subject to the earnings test due to filing at FRA. The spouse is entitled to a spousal benefit of 50% of the primary’s PIA; however, the earnings test will cause complete withholding of her benefit. The daughter will receive benefits until she reaches age 18. Impact of the family maximum??

Question 23

How is SS income reported?

Answer 23

Form SSA-1099

and Form SSA-1042S

Question 24

Where is the taxable portion of SS income reported on Form 1040?

Answer 24

Line 20

Question 25

How does reaching FRA impact the earnings test for the primary’s non working spouse who less than FRA?

Answer 25

The non working spouse will receive her spousal benefit without being impacted by the earnings test despite the fact that she is less than FRA. In this case, since the spouse doesn’t work, only the primary’s age matters.